Live fast, die young

Elyès Jouini () and Clotilde Napp

Economic Theory, 2016, vol. 62, issue 1, No 12, 265-278

Abstract: Abstract Irrational agents are driven out of the market. This should favor learning: Irrational agents observing that rational agents are being more successful should adopt rational beliefs. We show that the threat of elimination is not sufficient to push agents toward rationality: A shorter “life” might be more rewarding than a longer one. Even if they are eliminated in the long run, irrational agents might rationally stay irrational in the sense that their ex-ante and ex-post welfare levels over their whole life are higher than (1) the welfare level that they would reach if they adopted rational expectations, (2) the welfare level reached by the otherwise identical (same initial wealth and same risk aversion) rational agents, (3) the welfare level that they would have if they were given the optimal allocation of the rational agent. Threat of elimination is not sufficient to push irrational agents toward rationality, and rational and surviving agents’ performances are not sufficiently high to generate learning through an adaptive process based on imitation of successful behaviors. A numerical illustration is provided.

Keywords: Irrational beliefs; Rational expectations; Learning; Market elimination (search for similar items in EconPapers)
JEL-codes: D53 D90 G02 G11 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00199-015-0894-7

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