If You're so Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets

39 Pages Posted: 27 Sep 2001

See all articles by Lawrence E. Blume

Lawrence E. Blume

Cornell University - Department of Economics; Institute for Advanced Studies (IHS); Santa Fe Institute

David Easley

Cornell University - Department of Economics; Cornell University - Department of Information Science

Date Written: August 2001

Abstract

This paper provides an analysis of the asymptotic properties of consumption allocations in a stochastic general equilibrium model with heterogeneous consumers. In particular we investigate the market selection hypothesis, that markets favor traders with more accurate beliefs. We show that in any Pareto optimal allocation whether each consumer vanishes or survives is determined entirely by discount factors and beliefs. Since equilibrium allocations in economies with complete markets are Pareto optimal, our results characterize the limit behavior of these economies. We show that, all else equal, the market selects for consumers who use Bayesian learning with the truth in the support of their prior and selects among Bayesians according to the size of the their parameter space. Finally, we show that in economies with incomplete markets these conclusions may not hold. Payoff functions can matter for long run survival, and the market selection hypothesis fails.

Keywords: Market Selection Hypothesis, Subjective Beliefs, General Equilibrium, Incomplete Markets, Complete Markets

JEL Classification: D46, D51, D52, D81

Suggested Citation

Blume, Lawrence E. and Easley, David, If You're so Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets (August 2001). Cowles Foundation Discussion Paper No. 1319. Available at SSRN: https://ssrn.com/abstract=284833

Lawrence E. Blume (Contact Author)

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-9530 (Phone)

Institute for Advanced Studies (IHS)

Josefstädter Straße 39
1080 Vienna
Austria

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

David Easley

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)

Cornell University - Department of Information Science ( email )

402 Bill & Melinda Gates Hall
Ithaca, NY 14853
United States

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