Evolutionary beliefs and financial markets

Elyès Jouini (), Clotilde Napp and Yannick Viossat

Post-Print from HAL

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 (resp. overconfidence) as well as pessimism (resp. doubt) both emerge from the learning process. Furthermore, we obtain a positive correlation between pessimism (resp. 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: belief formation; heterogeneous beliefs; evolutionary game theory; pessimism; risk premium (search for similar items in EconPapers)
Date: 2013-02-13
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00927265
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Published in Review of Finance, 2013, 17 (2), pp.727-766. ⟨10.1093/rof/rfs004⟩

Downloads: (external link)
https://shs.hal.science/halshs-00927265/document (application/pdf)

Related works:
Journal Article: Evolutionary Beliefs and Financial Markets (2013)
Working Paper: Evolutionary Beliefs and Financial Markets (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00927265

DOI: 10.1093/rof/rfs004

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().