Evolution of heterogeneous beliefs and asset overvaluation

Dmitry Shapiro

Journal of Mathematical Economics, 2009, vol. 45, issue 3-4, 277-292

Abstract: I analyze a model in which different agents have different non-rational expectations about the future price and cash flows of a risky asset. The beliefs in the society evolve according to a very general class of evolution functions that are monotone; that is if one type has increased its share in the population then all types with higher profit should also have increased their shares. I show that the price of the risky asset converges to the risk-neutral fundamental price even though all agents in the economy are risk-averse. The risky asset thus becomes overvalued as compared to the equilibrium with rational expectations. The overvaluation is a result of the evolution of beliefs and does not rely on such asymmetric assumptions as short-sale constraints or optimistic bias.

Keywords: Heterogeneous; expectations; Evolutionary; dynamics; Overvaluation; Selection; mechanisms (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:45:y:2009:i:3-4:p:277-292

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