Can irrational investors survive in the long run? The role of generational type transmission

Scott S. Condie and Kerk L. Phillips

Economics Letters, 2016, vol. 139, issue C, 40-42

Abstract: This paper considers whether expected utility maximizers who have incorrect beliefs can survive as controllers of a significant portion of market wealth in the long run. Unlike infinitely-lived agent models, where this is not the case, we consider a model with successive generations of investors. Each generation inherits wealth and investor type from the previous generation. We show that if rational parents produce only rational children, and irrational parents always produce only irrational children, then the results from the infinitely-lived setup carry through. However, if parents of one type can produce even a small fraction of children of the other type, then irrational investors will always control a non-vanishing portion of total wealth. Hence, understanding the exact nature of the transmission of incorrect beliefs is key to understanding long-run market prices.

Keywords: Irrationality; Financial markets; Natural selection; Evolutionary dynamics; Market dynamics (search for similar items in EconPapers)
JEL-codes: D91 G02 G12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Can Irrational Investors Survive in the Long Run?: The Role of Generational Type Transmission (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:139:y:2016:i:c:p:40-42

DOI: 10.1016/j.econlet.2015.12.008

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