Are biased beliefs fit to survive? An experimental test of the market selection hypothesis

Chad Kendall and Ryan Oprea

Journal of Economic Theory, 2018, vol. 176, issue C, 342-371

Abstract: We experimentally study the “market selection hypothesis,” the classical claim that competitive markets bankrupt traders with biased beliefs, allowing unbiased competitors to survive. Prior theoretical work suggests the hypothesis can fail if biased traders over-invest in the market relative to their less biased competitors. Subjects in our experiment divide wealth between consumption and a pair of securities whose values are linked to a difficult reasoning problem. While most subjects in our main treatment form severely biased beliefs and systematically over-consume, the minority who form unbiased beliefs consume at near-optimal levels – an association that strongly supports the market selection hypothesis.

Keywords: Market selection hypothesis; Survival of the fittest; Efficient markets; Bayesian errors; Monty Hall problem; Experimental economics (search for similar items in EconPapers)
JEL-codes: C9 D03 G1 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053118301017
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:176:y:2018:i:c:p:342-371

DOI: 10.1016/j.jet.2018.04.005

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().