Evolutionary Portfolios Through the Small World Network
FSI Working Paper No. 5
25 Pages Posted: 16 Jul 2008
Date Written: July, 15 2008
Abstract
In the paper, I apply the small world network approach to analyze how investors manage their portfolios. This is done by a discrete time version evolutionary game of two kinds of interacting agents (risk-dominant and risk-averse) and two kinds of assets (risk-free and risky asset). Agents manage their portfolios through learning from experiences of other agents in the game. The evolutionary process takes place on a social network through which investors compare their returns with the returns of their friends and neighbors, while upon that knowledge they decide which strategy to adopt. I simulate several different models and also analyze effects of investors' (ir)rationality or procedurally rationality to their decisionmaking.
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