Evolution and Market Behavior: Wealth Dynamics and Learning
speaker: David Easley (Cornell University)abstract: The market selection hypothesis has a long history in both Economics and Finance, but it has only recently been formally investigated. Stated in its boldest form the market selection hypothesis is that competitive markets select for rational behavior by transferring wealth from those who behave irrationally to those who behave rationally. Thus, according to this hypothesis, allocations and prices are eventually close to those predicted by models in which individuals have correct beliefs, and maximize expected utility, and firms correctly maximize profits. Investigation of this hypothesis requires characterizing equilibrium in heterogeneous agent, stochastic general equilibrium economies. In these economies rationality as it is embodied in subjective expected utility maximization, and its implication of Bayesian learning, has almost no implications for equilibrium prices. So any structure has to come not from individual learning, or from aggregation (in this context the so-called Wisdom of Crowds), but rather from wealth dynamics. In this talk we summarize the current state of knowledge about the validity of the market selection hypothesis, and its implications for asset pricing. In short, we show that the hypothesis is correct for an interesting class of economies, but there are economies for which it is false. We also pose several open problems related to the market selection hypothesis and suggest approaches to solving them.
timetable:
Fri 2 Oct, 9:00 - 10:00, Aula 3
documents:
easley
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