Market selection with idiosyncratic uncertainty

Markus Sihvonen

Journal of Economic Theory, 2019, vol. 182, issue C, 143-160

Abstract: I analyze the survival probabilities of different types of agents in a general equilibrium model with disagreement over idiosyncratic uncertainties. I find that such biases create a separation between individual and group level survival: even when the survival probability of a single irrational agent tends to zero, these agents may still succeed as a whole. Effectively the irrational agent population can survive due to a vanishingly small group of increasingly rich agents. Disagreement over idiosyncratic uncertainties distorts savings decisions and interest rates, but idiosyncratic risks are not priced. Simulations confirm that the limiting results are relevant when the population of irrational agents is large.

Keywords: Market selection hypothesis; Asset pricing; Heterogeneous beliefs; General equilibrium (search for similar items in EconPapers)
JEL-codes: D53 D84 G12 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:182:y:2019:i:c:p:143-160

DOI: 10.1016/j.jet.2019.04.005

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