Evolutionary Strategic Beliefs and Financial Markets

36 Pages Posted: 20 Oct 2011  

Elyes Jouini

Univ. Paris Dauphine - CEREMADE

Clotilde Napp

CNRS and Université Paris-Dauphine

Yannick Viossat

Université Paris Dauphine - CEREMADE

Date Written: June 28, 2011

Abstract

We provide a discipline for belief formation through an evolutionary process which favors beliefs leading to higher utility levels at the Walrasian equilibrium. We show that such an evolutionary process converges to the Nash equilibrium in a game of strategic beliefs choices. The asymptotic beliefs are subjective and heterogeneous across the agents. Optimism (resp. overconfidence) as well as pessimism (resp. doubt) both emerge from the evolutionary process. Furthermore, we obtain a positive correlation between pessimism (resp. doubt) and risk-tolerance. We analyze the equilibrium characteristics. Under reasonable assumptions, the consensus belief is pessimistic and, as a consequence, the risk premium is higher than in a standard setting.

Keywords: belief formation, strategic beliefs, optimal beliefs, distorded beliefs, pessimism, risk premium

JEL Classification: G12, D03, D53, D81

Suggested Citation

Jouini, Elyes and Napp, Clotilde and Viossat, Yannick, Evolutionary Strategic Beliefs and Financial Markets (June 28, 2011). Available at SSRN: https://ssrn.com/abstract=1946484 or http://dx.doi.org/10.2139/ssrn.1946484

Elyes Jouini (Contact Author)

Univ. Paris Dauphine - CEREMADE ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France
+ 33 1 44 05 46 75 (Phone)
+ 33 1 44 05 45 99 (Fax)

Clotilde Napp

CNRS and Université Paris-Dauphine ( email )

Place de Lattre de Tassigny
Paris, 75775
France

Yannick Viossat

Université Paris Dauphine - CEREMADE ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France

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