Behavioral Finance through the Lens of Evolution: "Survival of the Fittest" for Portfolio Rules

24 Pages Posted: 1 Sep 2023 Last revised: 5 Sep 2023

See all articles by Igor V. Evstigneev

Igor V. Evstigneev

University of Manchester - Economics, School of Social Sciences

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute

Mohammad Javad Vanaei

The University of Manchester

Mikhail Zhitlukhin

Steklov Mathematical Institute

Date Written: August 31, 2023

Abstract

This paper analyzes a dynamic stochastic equilibrium model of an asset market based on behavioral and evolutionary principles. The core of the model is a non-traditional game-theoretic framework combining elements of stochastic dynamic games and evolutionary game theory. Its key characteristic feature is that it relies only on objectively observable market data and does not use hidden individual agents' characteristics (such as their utilities and beliefs). A central goal of the study is to identify an investment strategy that allows an investor to survive in the market selection process, i.e., to keep with probability one a strictly positive, bounded away from zero share of market wealth over an infinite time horizon, irrespective of the strategies used by the other players. The main results show that under very general assumptions, such a strategy exists, is asymptotically unique and easily computable. Most of the related models currently considered in this field assume that asset payoffs are exogenous and depend only on the underlying stochastic process of states of the world. The present work develops a modeling framework where the payoffs are endogenous: they depend on the share of total market wealth invested in the asset.

Keywords: Evolutionary Finance, Behavioral Finance, Stochastic dynamic games, DSGE, Survival portfolio rules

JEL Classification: C73, D53, D58, G11, G02

Suggested Citation

Evstigneev, Igor V. and Hens, Thorsten and Vanaei, Mohammad Javad and Zhitlukhin, Mikhail, Behavioral Finance through the Lens of Evolution: "Survival of the Fittest" for Portfolio Rules (August 31, 2023). Swiss Finance Institute Research Paper No. 23-72, Available at SSRN: https://ssrn.com/abstract=4558471 or http://dx.doi.org/10.2139/ssrn.4558471

Igor V. Evstigneev

University of Manchester - Economics, School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom
+44 161 2754275 (Phone)
+44 161 2754812 (Fax)

HOME PAGE: http://www.evstigneev.net

Thorsten Hens (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Mohammad Javad Vanaei

The University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

Mikhail Zhitlukhin

Steklov Mathematical Institute ( email )

Gubkina St. 8
Moscow, 119991
Russia

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