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

63 Pages Posted: 28 Nov 2023 Last revised: 15 Apr 2024

See all articles by Pablo F. Beker

Pablo F. Beker

University of Warwick

Jaden Yang Chen

University of North Carolina (UNC) at Chapel Hill

Date Written: October 29, 2023

Abstract

This paper provides a unified framework to study the equilibrium consumption allocations
in stochastic exchange economies where consumers’ preferences belong to a general class of
recursive preferences, encompassing expected-utility and several common non-expected utility
preferences. We provide a characterization of the long-run consumption dynamics when markets
are complete 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
survival of heterogeneous consumers is the robust long-run outcome in our general framework.
In particular, a consumer with incorrect beliefs can survive regardless of other consumers’
preferences and beliefs. Our results imply there is an inherent tension between two broadly
held tenets in economics and finance, that markets allocate resources efficiently and prices
eventually reflect correct beliefs.

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 (UNC) at Chapel Hill ( email )

Chapel Hill, NC 27599
United States

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