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Fund managers - why the best might be the worst: On the evolutionary vigor of risk-seeking behavior

  • Witte, Björn-Christopher
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    This article explores the influence of competitive conditions on the evolutionary fitness of different risk preferences. As a practical example, the professional competition between fund managers is considered. To explore how different settings of competition parameters, the exclusion rate and the exclusion interval, affect individual investment behavior, an evolutionary model based on a genetic algorithm is developed. The simulation experiments indicate that the influence of competitve conditions on investment behavior and attitudes towards risk is significant. What is alarming is that intense competitive pressure generates riskseeking behavior and undermines the predominance of the most skilled.

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    File URL: http://econstor.eu/bitstream/10419/50318/1/666346313.pdf
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    Paper provided by Bamberg University, Bamberg Economic Research Group in its series BERG Working Paper Series with number 81.

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    Date of creation: 2011
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    Handle: RePEc:zbw:bamber:81
    Contact details of provider: Postal: D-96045 Bamberg
    Phone: 0951/8632687
    Fax: 0951/8632550
    Web page: http://www.uni-bamberg.de/vwl/forschung/berg/

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    7. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
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    16. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    17. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
    18. Lawrence Blume & David Easley, 2001. "If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Working Papers 01-06-031, Santa Fe Institute.
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