Market Selection with Idiosyncratic Uncertainty
39 Pages Posted: 14 May 2018 Last revised: 18 Apr 2019
Date Written: April 17, 2019
I analyze the survival probabilities of different types of agents in a general equilibrium model with disagreement over idiosyncratic uncertainties. I find that such biases create a separation between individual and group level survival: even when the survival probability of a single irrational agent tends to zero, these agents may still succeed as a whole. Effectively the irrational agent population can survive due to a vanishingly small group of increasingly rich agents. Disagreement over idiosyncratic uncertainties distorts savings decisions and interest rates, but idiosyncratic risks are not priced. Simulations confirm that the limiting results are relevant when the population of irrational agents is large.
Keywords: Market Selection Hypothesis, Heterogeneous Beliefs, General Equilibrium
JEL Classification: D51, D84, G12
Suggested Citation: Suggested Citation