Can Irrational Investors Survive in the Long Run?: The Role of Generational Type Transmission

Scott S. Condie and Kerk L. Phillips
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Scott S. Condie: Department of Economics, Brigham Young University
Kerk L. Phillips: Department of Economics, Brigham Young University

No 2014-09, BYU Macroeconomics and Computational Laboratory Working Paper Series from Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory

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 irrationality is key to understanding how markets behave.

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)
Pages: 6 pages
Date: 2014-10
New Economics Papers: this item is included in nep-upt
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https://docs.google.com/file/d/0B6KGaihAO5TJemsyTmpFUlJ0MU0/edit First version, 2014 (application/pdf)

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Journal Article: Can irrational investors survive in the long run? The role of generational type transmission (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:byu:byumcl:201409

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