Modern finance is undergoing an important change in the perception of economic agents, i.e., from a representative, rational agent approach towards a behavioral, agent-based approach with markets boundedly rational, where heterogeneous agents apply rule of thumb strategies.

The new behavioral, heterogeneous agents approach challenges the traditional representative rational agent framework. Heterogeneity in expectations leads to market instability and complicated price dynamics. Prices are driven by endogenous market forces. Typically, in the heterogeneous agents model (HAM), two types of agents are typically distinguished: fundamentalists and chartists. We add a new type of agent, who does not have fixed beliefs about future returns but uses a prediction, which is based on previous returns (information set).

We use the core of the Brock and Hommes (1998) model introducing further extensions, such as stochastic formation of beliefs and parameters including the memory length. Another extension is the application of the well known Worst Out Algorithm (WOA). The WOA periodically replaces the trading strategies that have the lowest performance level of the strategies presented on the market by new ones.

We have used the WOA in an effort to gain a better understanding of the evolution of financial market dynamics. The WOA periodically replaces the trading strategies that have the lowest performance level of the strategies presented on the market by new ones. Due to these features the model more closely replicates the events of a real financial market. The WOA adds behavioral aspect to the model and we obtain outcomes that are closer to stylized facts.

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