Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality

52 Pages Posted: 23 Dec 2020 Last revised: 27 May 2022

See all articles by Roger E. A. Farmer

Roger E. A. Farmer

University of Warwick; University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); National Institute of Economic and Social Research (NIESR)

Jean-Philippe Bouchaud

Université Paris VI Pierre et Marie Curie - College de France

Multiple version iconThere are 2 versions of this paper

Date Written: December 2020

Abstract

We construct a model of an exchange economy in which agents trade assets contingent on an observable signal, the probability of

which depends on public opinion. The agents in our model are replaced occasionally and each person updates beliefs in response to

observed outcomes. We show that the distribution of the observed signal is described by a quasi-non-ergodic process and that people

continue to disagree with each other forever. Interestingly, these disagreements generate large wealth inequalities that arise from the

multiplicative nature of wealth dynamics which makes successful bold bets highly proâ??table. People who agree with the market belief

have a low expected subjective gain from trading. People who disagree may either become spectacularly rich, or spectacularly poor. The flip side is that such wealth inequalities lead to persistent discrepancies between market implied probabilities and true probabilities.

Suggested Citation

Farmer, Roger E.A. and Bouchaud, Jean-Philippe, Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality (December 2020). CEPR Discussion Paper No. DP15573, Available at SSRN: https://ssrn.com/abstract=3753978

Roger E.A. Farmer

University of Warwick ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://Rogerfarmer.com

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Jean-Philippe Bouchaud (Contact Author)

Université Paris VI Pierre et Marie Curie - College de France ( email )

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Paris, 75005
France

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