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Evolutionary Beliefs and Financial Markets

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Author Info

  • Elyès Jouini

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)

  • Clotilde Napp

    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine)

  • Yannick Viossat

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)

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    Abstract

    Why do investors keep different opinions even though they learn from their own failures and successes? Why do investors keep different opinions even though they observe each other and learn from their relative failures and successes? We analyze beliefs dynamics when beliefs result from a very general learning process that favors beliefs leading to higher absolute or relative utility levels. We show that such a process converges to the Nash equilibrium in a game of strategic belief choices. The asymptotic beliefs are subjective and heterogeneous across the agents. Optimism (respectively overconfidence) as well as pessimism (respectively doubt) emerge from the learning process. Furthermore, we obtain a positive correlation between pessimism (respectively doubt) and risk tolerance. Under reasonable assumptions, beliefs exhibit a pessimistic bias and, as a consequence, the risk premium is higher than in a standard setting.

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    Bibliographic Info

    Paper provided by HAL in its series Post-Print with number halshs-00778537.

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    Date of creation: 01 Mar 2012
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    Publication status: Published, Review of Finance, 2012, en ligne
    Handle: RePEc:hal:journl:halshs-00778537

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00778537
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    Web page: http://hal.archives-ouvertes.fr/

    Related research

    Keywords: heterogeneous beliefs; Beliefs formation; evolutionary game theory; risk premium; pessimism;

    This paper has been announced in the following NEP Reports:

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