Evolutionary strategic beliefs and financial markets
AbstractWe provide a discipline for belief formation through a model of subjective beliefs, in which agents hold strategic beliefs. More precisely, we consider beliefs as a strategic variable that agents can choose (consciously or not) in order to maximize their utility at the equilibrium. These strategic beliefs result from an evolutionary process. We find that evolutionary strategic behavior leads to belief subjectivity and heterogeneity. Optimism (resp. overconfidence) as well as pessimism (resp. doubt) both emerge from the evolution process. Furthermore, we obtain a positive correlation between pessimism (rep. doubt) and risk-tolerance. We analyse the equilibrium characteristics. Under reasonable assumptions, the consensus belief is pessimistic and, as a consequence, the risk premium is higher than in a standard setting.
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Date of creation: 01 Mar 2012
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Publication status: Published, Review of Finance, 2012, 1
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Beliefs formation; strategic beliefs; optimal beliefs; distorded beliefs; pessimism; risk premium;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-01 (All new papers)
- NEP-EVO-2012-02-01 (Evolutionary Economics)
- NEP-GTH-2012-02-01 (Game Theory)
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