The market organism: Long-run survival in markets with heterogeneous traders
The information content of prices is a central problem in the general equilibrium analysis of competitive markets. Rational expectations equilibrium identifies conditioning simultaneously on contemporaneous prices and private information as the mechanism by which information enters prices. Here we look to the ecology of markets for an explanation of the information content of prices. Markets could select across traders with different beliefs, or, reminiscent of 'the wisdom of crowds', markets could balance the diverse information of many participants. We provide theoretical support in favor of the first mechanism, and against the second. Along the way we demonstrate that the necessary condition for long-run survival in complete markets found in Sandroni [2000. Do markets favor agents able to make accurate predictions? Econometrica 68 (6), 1303-1342] and in Blume and Easley [2006. If you're so smart, why aren't you rich? Belief selection in complete and incomplete markets. Econometrica 74 (4), 929-966] is not sufficient for long-run survival. We also demonstrate some surprising behavior of market prices when several trader types with different beliefs survive. This paper continues the research program of Blume and Easley [1992. Evolution and market behavior. Journal of Eonomic theory 58 (1), 9-40] and Beker and Chattopadhyay [2006. Consumption dynamics in general equilibrium: a characterisation when markets are incomplete, University of Warwick, unpublished].
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- Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
- George J. Mailath & Alvaro Sandroni, 2000.
"Market Selection and Asymmetric Information,"
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mkt-selection, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- George J. Mailath & Alvaro Sandroni, . "Market Selection and Asymmetrick Information," CARESS Working Papres 00-07, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- George J. Mailath & Alvaro Sroni, . "Market Selection and Asymmetric Information," Penn CARESS Working Papers d50f0ddbbf9f79b6e05bb90a5, Penn Economics Department.
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- Beker, Pablo & Chattopadhyay, Subir, 2010.
"Consumption dynamics in general equilibrium: A characterisation when markets are incomplete,"
Journal of Economic Theory,
Elsevier, vol. 145(6), pages 2133-2185, November.
- Beker, Pablo & Subir Chattopadhyay, 2009. "Consumption Dynamics in General Equilibrium : A Characterisation when Markets are Incomplete," The Warwick Economics Research Paper Series (TWERPS) 921, University of Warwick, Department of Economics.
- Alvaro Sandroni, 2000. "Do Markets Favor Agents Able to Make Accurate Predicitions?," Econometrica, Econometric Society, vol. 68(6), pages 1303-1342, November.
- Snyder, Wayne W, 1978. "Horse Racing: Testing the Efficient Markets Model," Journal of Finance, American Finance Association, vol. 33(4), pages 1109-18, September.
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