Abstract

https://ssrn.com/abstract=1946484
 
 

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Evolutionary Strategic Beliefs and Financial Markets


Elyes Jouini


Univ. Paris Dauphine - CEREMADE

Clotilde Napp


CNRS and Université Paris-Dauphine

Yannick Viossat


Université Paris Dauphine - CEREMADE

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.

Number of Pages in PDF File: 36

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

JEL Classification: G12, D03, D53, D81


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Date posted: October 20, 2011  

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

Contact Information

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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