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Are biased beliefs fit to survive? An experimental test of the market selection hypothesis

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  • Kendall, Chad
  • Oprea, Ryan

Abstract

We experimentally study the “market selection hypothesis,” the classical claim that competitive markets bankrupt traders with biased beliefs, allowing unbiased competitors to survive. Prior theoretical work suggests the hypothesis can fail if biased traders over-invest in the market relative to their less biased competitors. Subjects in our experiment divide wealth between consumption and a pair of securities whose values are linked to a difficult reasoning problem. While most subjects in our main treatment form severely biased beliefs and systematically over-consume, the minority who form unbiased beliefs consume at near-optimal levels – an association that strongly supports the market selection hypothesis.

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  • Kendall, Chad & Oprea, Ryan, 2018. "Are biased beliefs fit to survive? An experimental test of the market selection hypothesis," Journal of Economic Theory, Elsevier, vol. 176(C), pages 342-371.
    • Handle: RePEc:eee:jetheo:v:176:y:2018:i:c:p:342-371
    DOI: 10.1016/j.jet.2018.04.005
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    Cited by:

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    4. Alasdair Brown & Fuyu Yang, 2021. "Framing effects and the market selection hypothesis: Evidence from real‐world isomorphic bets," Southern Economic Journal, John Wiley & Sons, vol. 88(1), pages 399-413, July.
    5. Joy A. Buchanan & Daniel Houser, 2017. "What if Wages Fell During a Recession?," Working Papers 1062, George Mason University, Interdisciplinary Center for Economic Science, revised Aug 2017.
    6. Choo, Lawrence & Zhou, Xiaoyu, 2022. "Can market selection reduce anomalous behaviour in games?," European Economic Review, Elsevier, vol. 141(C).

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    More about this item

    Keywords

    Market selection hypothesis; Survival of the fittest; Efficient markets; Bayesian errors; Monty Hall problem; Experimental economics;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G1 - Financial Economics - - General Financial Markets

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