If You're NOT So Smart, Why Are You Rich? Robust Market Selection with General Recursive Preferences

58 Pages Posted: 28 Nov 2023

See all articles by Pablo F. Beker

Pablo F. Beker

University of Warwick

Jaden Yang Chen

University of North Carolina at Chapel Hill

Date Written: October 29, 2023

Abstract

This paper provides a unified framework to study the long-run dynamics of competitive equilibrium consumption allocations in stochastic exchange economies with complete markets and multiple consumers whose preferences belong to a general class of recursive preferences, encompassing both expected-utility and various common non-expected utility preferences. We provide a characterization of the long-run consumption dynamics and apply it to study the robustness of the market selection hypothesis that market favors consumers with more accurate beliefs. In sharp contrast to the results for the class of expected utility studied by Sandroni (2000) and Blume and Easley (2006), we show that the existence of multiple survivors is the robust long-run outcome for our general class of preferences. Our results imply there is an inherent tension between two broadly held tenets in economics and finance, that markets allocate resources efficiently and equilibrium allocations can eventually be described as a rational expectations equilibrium.

Keywords: Market selection hypothesis, rational expectations, belief heterogeneity, heterogeneous consumers, recursive preferences, non-expected utility, robustness

JEL Classification: D50, D81

Suggested Citation

Beker, Pablo F. and Chen, Jaden Yang, If You're NOT So Smart, Why Are You Rich? Robust Market Selection with General Recursive Preferences (October 29, 2023). Available at SSRN: https://ssrn.com/abstract=4616770 or http://dx.doi.org/10.2139/ssrn.4616770

Pablo F. Beker

University of Warwick ( email )

Department of Economics
Gibbet Hill Rd
Coventry, Coventry CV4 7AL
United Kingdom
+44 (0)24 76150588 (Phone)
+ 44 (0)24 7652 3032 (Fax)

HOME PAGE: http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/beker/

Jaden Yang Chen (Contact Author)

University of North Carolina at Chapel Hill ( email )

Chapel Hill, NC 27599
United States

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