Articles

Darwinian selection does not eliminate irrational traders

B. BIAIS, R. SHADUR

European Economic Review

March 2000, vol. 44, n°3, pp.469-490

Departments: Finance

Keywords: Darwinian selectionEvolutionary dynamicsIrrationalityFinancial marketsStochastic algorithms

http://www.sciencedirect.com/science/article/pii/S0014292198000841


This paper offers a counter-argument to Friedman's (In: Essays in Positive Economics, University of Chicago Press, Chicago, 1953) claim that irrational agents are bound to be eliminated by market forces. Consider a financial market where some traders irrationally over- or under-estimate the dividend flow. We show that this irrationality can enhance their bargaining power, so that these agents can obtain larger gains from trade than rational agents. We analyze the stochastic evolutionary dynamics of the fraction of agents who are irrational, and show that they may well survive in the long term


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