Behavioral Finance through the Lens of Evolution: "Survival of the Fittest" for Portfolio Rules

Igor V. Evstigneev, Thorsten Hens, Mohammad Javad Vanaei and Mohammad Mikhail Zhitlukhin
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Igor V. Evstigneev: University of Manchester
Thorsten Hens: University of Zurich, Norwegian School of Economics and Business Administration, University of Lucerne, and Swiss Finance Institute
Mohammad Javad Vanaei: University of Manchester
Mohammad Mikhail Zhitlukhin: Steklov Mathematical Institute

No 23-72, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper analyzes a dynamic stochastic equilibrium model of an asset market based on behavioral and evolutionary principles. The core of the model is a non-traditional game-theoretic framework combining elements of stochastic dynamic games and evolutionary game theory. Its key characteristic feature is that it relies only on objectively observable market data and does not use hidden individual agents' characteristics (such as their utilities and beliefs). A central goal of the study is to identify an investment strategy that allows an investor to survive in the market selection process, i.e., to keep with probability one a strictly positive, bounded away from zero share of market wealth over an infinite time horizon, irrespective of the strategies used by the other players. The main results show that under very general assumptions, such a strategy exists, is asymptotically unique and easily computable. Most of the related models currently considered in this field assume that asset payoffs are exogenous and depend only on the underlying stochastic process of states of the world. The present work develops a modeling framework where the payoffs are endogenous: they depend on the share of total market wealth invested in the asset.

Keywords: Evolutionary Finance; Behavioral Finance; Stochastic dynamic games; DSGE; Survival portfolio rules (search for similar items in EconPapers)
JEL-codes: C73 D53 D58 G02 G11 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2023-08
New Economics Papers: this item is included in nep-dge, nep-evo and nep-gth
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