Evolutionary Beliefs and Financial Markets

Elyès Jouini (), Clotilde Napp and Yannick Viossat

Abstract: Why do investors keep different opinions even though they learn from their own failures and successes? Why do investors keep different opinions even though they observe each other and learn from their relative failures and successes? We analyze beliefs dynamics when beliefs result from a very general learning process that favors beliefs leading to higher absolute or relative utility levels. We show that such a process converges to the Nash equilibrium in a game of strategic belief choices. The asymptotic beliefs are subjective and heterogeneous across the agents. Optimism (respectively overconfidence) as well as pessimism (respectively doubt) emerge from the learning process. Furthermore, we obtain a positive correlation between pessimism (respectively doubt) and risk tolerance. Under reasonable assumptions, beliefs exhibit a pessimistic bias and, as a consequence, the risk premium is higher than in a standard setting.

Keywords: heterogeneous beliefs; Beliefs formation; evolutionary game theory; risk premium; pessimism (search for similar items in EconPapers)
Date: 2012-03-01
New Economics Papers: this item is included in nep-evo and nep-hpe
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Published in Review of Finance, 2012, pp.en ligne

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Related works:
Journal Article: Evolutionary Beliefs and Financial Markets (2013)
Working Paper: Evolutionary beliefs and financial markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00778537

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