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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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    2. Judith Chevalier & Glenn Ellison, 1996. "Are Some Mutual Funds Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance," NBER Working Papers 5852, National Bureau of Economic Research, Inc.
    3. Lensberg, Terje, 1999. "Investment behavior under Knightian uncertainty - An evolutionary approach," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1587-1604, September.
    4. Tesfatsion, Leigh & Judd, Kenneth L., 2006. "Handbook of Computational Economics, Vol. 2: Agent-Based Computational Economics," Staff General Research Papers 10368, Iowa State University, Department of Economics.
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    7. Larry Blume & David Easley, 2001. "If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Cowles Foundation Discussion Papers 1319, Cowles Foundation for Research in Economics, Yale University.
    8. Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2002. "Market Selection Of Financial Trading Strategies: Global Stability," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 329-339.
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    13. repec:att:wimass:9621 is not listed on IDEAS
    14. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
    15. Judith Chevalier & Glenn Ellison, 1999. "Career Concerns Of Mutual Fund Managers," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 389-432, May.
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    17. Xavier Gabaix, 2008. "Power Laws in Economics and Finance," NBER Working Papers 14299, National Bureau of Economic Research, Inc.
    18. Farrell, M J, 1970. "Some Elementary Selection Processes in Economics," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 305-19, July.
    19. Lettau, Martin, 1997. "Explaining the facts with adaptive agents: The case of mutual fund flows," Journal of Economic Dynamics and Control, Elsevier, vol. 21(7), pages 1117-1147, June.
    20. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
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