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Darwinian adverse selection

Author

Listed:
  • Kuhle, Wolfgang

    (Wolfgang Kuhle, Max Planck Institute for Research on Collective Goods)

Abstract

We develop a model to study the role of individual rationality in economics and biology. The model’s agents differ continuously in their ability to make rational choices. The agents’ objective is to ensure their individual survival over time or, equivalently, to maximize profits. In equilibrium, however, individually rational agents who maximize their objective survival probability are, individually and collectively, eliminated by the forces of competition. Instead of individual rationality, there emerges a unique distribution of irrational players who are individually not fit for the struggle of survival. The selection of irrational players over rational ones relies on the fact that all rational players coordinate on the same optimal action, which leaves them collectively undiversified and thus vulnerable to aggregate risks.

Suggested Citation

  • Kuhle, Wolfgang, 2016. "Darwinian adverse selection," Algorithmic Finance, IOS Press, vol. 5(1-2), pages 31-36.
    • Handle: RePEc:ris:iosalg:0047
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    Cited by:

    1. Wolfgang Kuhle, 2016. "An Equilibrium Model with Computationally Constrained Agents," Papers 1611.01771, arXiv.org.

    More about this item

    Keywords

    Maximization; individual rationality; economics; biology;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General

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