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The market organism: Long-run survival in markets with heterogeneous traders

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  • Blume, Lawrence
  • Easley, David

Abstract

The information content of prices is a central problem in the general equilibrium analysis of competitive markets. Rational expectations equilibrium identifies conditioning simultaneously on contemporaneous prices and private information as the mechanism by which information enters prices. Here we look to the ecology of markets for an explanation of the information content of prices. Markets could select across traders with different beliefs, or, reminiscent of 'the wisdom of crowds', markets could balance the diverse information of many participants. We provide theoretical support in favor of the first mechanism, and against the second. Along the way we demonstrate that the necessary condition for long-run survival in complete markets found in Sandroni [2000. Do markets favor agents able to make accurate predictions? Econometrica 68 (6), 1303-1342] and in Blume and Easley [2006. If you're so smart, why aren't you rich? Belief selection in complete and incomplete markets. Econometrica 74 (4), 929-966] is not sufficient for long-run survival. We also demonstrate some surprising behavior of market prices when several trader types with different beliefs survive. This paper continues the research program of Blume and Easley [1992. Evolution and market behavior. Journal of Eonomic theory 58 (1), 9-40] and Beker and Chattopadhyay [2006. Consumption dynamics in general equilibrium: a characterisation when markets are incomplete, University of Warwick, unpublished].

Suggested Citation

  • Blume, Lawrence & Easley, David, 2009. "The market organism: Long-run survival in markets with heterogeneous traders," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1023-1035, May.
    • Handle: RePEc:eee:dyncon:v:33:y:2009:i:5:p:1023-1035
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    References listed on IDEAS

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    1. Peleg, Bezalel & Yaari, Menahem E, 1970. "Markets with Countably Many Commodities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 369-377, October.
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    3. George J. Mailath & Alvaro Sandroni, 2003. "Market Selection and Asymmetric Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 343-368.
    4. Lawrence Blume & David Easley, 2006. "If You're so Smart, why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Econometrica, Econometric Society, vol. 74(4), pages 929-966, July.
    5. Alvaro Sandroni, 2000. "Do Markets Favor Agents Able to Make Accurate Predicitions?," Econometrica, Econometric Society, vol. 68(6), pages 1303-1342, November.
    6. Beker, Pablo & Chattopadhyay, Subir, 2010. "Consumption dynamics in general equilibrium: A characterisation when markets are incomplete," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2133-2185, November.
    7. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
    8. Snyder, Wayne W, 1978. "Horse Racing: Testing the Efficient Markets Model," Journal of Finance, American Finance Association, vol. 33(4), pages 1109-1118, September.
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    Cited by:

    1. Dindo, Pietro & Massari, Filippo, 2020. "The wisdom of the crowd in dynamic economies," Theoretical Economics, Econometric Society, vol. 15(4), November.
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    3. Norman, Thomas W.L., 2020. "Market selection with an endogenous state," Journal of Mathematical Economics, Elsevier, vol. 91(C), pages 51-59.
    4. Anufriev, Mikhail & Dindo, Pietro, 2010. "Wealth-driven selection in a financial market with heterogeneous agents," Journal of Economic Behavior & Organization, Elsevier, vol. 73(3), pages 327-358, March.
    5. Takayama, Shino, 2021. "Price manipulation, dynamic informed trading, and the uniqueness of equilibrium in sequential trading," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    6. Elyès Jouini & Clotilde Napp, 2010. "Unbiased Disagreement in Financial Markets, Waves of Pessimism and the Risk-Return Trade-off," Review of Finance, European Finance Association, vol. 15(3), pages 575-601.
    7. Bottazzi, Giulio & Giachini, Daniele & Ottaviani, Matteo, 2023. "Market selection and learning under model misspecification," Journal of Economic Dynamics and Control, Elsevier, vol. 156(C).
    8. Michele Vodret & Iacopo Mastromatteo & Bence Tóth & Michael Benzaquen, 2023. "Microfounding GARCH models and beyond: a Kyle-inspired model with adaptive agents," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(3), pages 599-625, July.
    9. Thomas Holtfort, 2019. "From standard to evolutionary finance: a literature survey," Management Review Quarterly, Springer, vol. 69(2), pages 207-232, June.
    10. Dindo, Pietro, 2019. "Survival in speculative markets," Journal of Economic Theory, Elsevier, vol. 181(C), pages 1-43.
    11. Giulio Bottazzi & Pietro Dindo & Daniele Giachini, 2018. "Long-run heterogeneity in an exchange economy with fixed-mix traders," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(2), pages 407-447, August.
    12. He, Xue-Zhong & Shi, Lei, 2017. "Index portfolio and welfare analysis under heterogeneous beliefs," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 64-79.
    13. Andrea Antico & Giulio Bottazzi & Daniele Giachini, 2022. "On the evolutionary stability of the sentiment investor," LEM Papers Series 2022/09, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    14. Daniele Giachini, 2018. "Rationality and Asset Prices under Belief Heterogeneity," LEM Papers Series 2018/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    15. Beker, Pablo F. & Espino, Emilio, 2011. "The dynamics of efficient asset trading with heterogeneous beliefs," Journal of Economic Theory, Elsevier, vol. 146(1), pages 189-229, January.
    16. G. Bottazzi & D. Giachini, 2019. "Far from the madding crowd: collective wisdom in prediction markets," Quantitative Finance, Taylor & Francis Journals, vol. 19(9), pages 1461-1471, September.
    17. Serena Brianzoni & Cristiana Mammana & Elisabetta Michetti, 2010. "Updating Wealth in an Asset Pricing Model with Heterogeneous Agents," Discrete Dynamics in Nature and Society, Hindawi, vol. 2010, pages 1-27, November.
    18. Giulio Bottazzi & Daniele Giachini, 2018. "New Results on Betting Strategies, Market Selection, and the Role of Luck," LEM Papers Series 2018/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    19. Massari, Filippo, 2017. "Markets with heterogeneous beliefs: A necessary and sufficient condition for a trader to vanish," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 190-205.

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