Survival and the Art of Profit Maximization

21 Pages Posted: 3 Nov 2008

See all articles by Prajit K. Dutta

Prajit K. Dutta

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Date Written: April 2001

Abstract

We study the relationship between rationality and economic survival in a simple dynamic model, where agents from different populations interact repeatedly through random matching. An explicit criterion ("bankruptcy") determines whether agents survive each interaction; all agents are presumed to be aware of this criterion. Survival in each interaction depends on two factors: the strategies agents adopt when they interact, and the wealth levels they bring to the game. The model is completely symmetric with the only difference between the agents of different populations being their objectives.We consider the case where there are two populations of agents in which all agents from one group have as their objective, maximizing the expected profits from each interaction, while all the agents from the other attempt simply to maximize the probability of surviving (i.e., not going bankrupt in) the interaction. We show that under the equilibrium of dynamics, the proportions of each group in the total population must be bounded away from zero, but the balance is in favor of the survival-probability maximizers in that their numbers as a fraction of total population must always exceed 1/2, and can be arbitrarily close to unity. On the other hand, the fraction of total wealth controlled by the expected profit maximizers must also be at least 1/2, and can asymptotically tend to unity.

Suggested Citation

Dutta, Prajit K. and Sundaram, Rangarajan K., Survival and the Art of Profit Maximization (April 2001). NYU Working Paper No. FIN-01-036. Available at SSRN: https://ssrn.com/abstract=1294582

Prajit K. Dutta (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

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