Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality

Jean-Philippe Bouchaud and Roger Farmer

No 15573, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We construct a model of an exchange economy in which agents trade assets contingent on an observable signal, the probability of which depends on public opinion. The agents in our model are replaced occasionally and each person updates beliefs in response to observed outcomes. We show that the distribution of the observed signal is described by a quasi-non-ergodic process and that people continue to disagree with each other forever. Interestingly, these disagreements generate large wealth inequalities that arise from the multiplicative nature of wealth dynamics which makes successful bold bets highly pro table. People who agree with the market belief have a low expected subjective gain from trading. People who disagree may either become spectacularly rich, or spectacularly poor. The flip side is that such wealth inequalities lead to persistent discrepancies between market implied probabilities and true probabilities.

Date: 2022-04
New Economics Papers: this item is included in nep-cwa
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Working Paper: Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality (2020)
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