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Evolutionary strategic beliefs and financial markets

Elyès Jouini (), Clotilde Napp and Yannick Viossat

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Abstract: We provide a discipline for belief formation through a model of subjective beliefs, in which agents hold strategic beliefs. More precisely, we consider beliefs as a strategic variable that agents can choose (consciously or not) in order to maximize their utility at the equilibrium. These strategic beliefs result from an evolutionary process. We find that evolutionary strategic behavior leads to belief subjectivity and heterogeneity. Optimism (resp. overconfidence) as well as pessimism (resp. doubt) both emerge from the evolution process. Furthermore, we obtain a positive correlation between pessimism (rep. doubt) and risk-tolerance. We analyse the equilibrium characteristics. Under reasonable assumptions, the consensus belief is pessimistic and, as a consequence, the risk premium is higher than in a standard setting.

Keywords: Beliefs formation; strategic beliefs; optimal beliefs; distorded beliefs; pessimism; risk premium (search for similar items in EconPapers)
Date: 2012-03-01
New Economics Papers: this item is included in nep-evo and nep-gth
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00556490
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Citations: View citations in EconPapers (1)

Published in Review of Finance, 2012, pp.1

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