Schizophrenic Representative Investors

Abstract

Representative investors whose behavior is modeled by a deterministic finite automaton generate complexity both in the time series of each asset and in the cross-sectional correlation when the rule governing their behavior is schizophrenic, meaning the investor holds multiple seemingly contradictory beliefs simultaneously, either by switching between two different rules at each time step, or computing different responses to different assets.

Keywords: complexity, representative investor, deterministic, behavioural

JEL Classification: G10, G12