From: Robin Hanson (rhanson@gmu.edu)
Date: Sun Jun 15 2003 - 10:58:37 MDT
What beliefs and preferences will our descendants have? If they are determined
by a evolutionary selection process, this paper generalizes previous results to
suggest that they will be Bayesians who do not discount future consumption.
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http://econpapers.hhs.se/paper/cwlcwldpp/1319.htm
If You're So Smart, Why Aren't You Rich?
Belief Selection in Complete and Incomplete Markets
by Lawrence Blume and David Easley
This paper provides an analysis of the asymptotic properties of consumption
allocations in a stochastic general equilibrium model with heterogeneous
consumers. In particular we investigate the market selection hypothesis,
that markets favor traders with more accurate beliefs. We show that in any
Pareto optimal allocation whether each consumer vanishes or survives is
determined entirely by discount factors and beliefs. Since equilibrium
allocations in economies with complete markets are Pareto optimal, our
results characterize the limit behavior of these economies. We show that,
all else equal, the market selects for consumers who use Bayesian learning
with the truth in the support of their prior and selects among Bayesians
according to the size of the their parameter space. Finally, we show that in
economies with incomplete markets these conclusions may not hold. Payoff
functions can matter for long run survival, and the market selection
hypothesis fails.
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Robin Hanson rhanson@gmu.edu http://hanson.gmu.edu
Assistant Professor of Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030-4444
703-993-2326 FAX: 703-993-2323
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