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Evolution in pecunia

Author

Listed:
  • Rabah Amir

    (Department of Economics, University of Iowa, Iowa City, IA 52242; Institute for Advanced Study (IMéRa), Aix-Marseille University, Marseille 13004, France; Aix-Marseille School of Economics, Aix-Marseille University, Marseille 13001, France)

  • Igor V. Evstigneev

    (Department of Economics, University of Manchester, Manchester M13 9PL, United Kingdom; Institute for Information Transmission Problems, Russian Academy of Sciences, Moscow 127051, Russian Federation, Russia)

  • Thorsten Hens

    (Department of Banking and Finance, University of Zurich, CH-8032 Zurich, Switzerland; Department of Finance, Norwegian School of Economics, N-5045 Bergen, Norway; Department of Economics, University of Lucerne, CH-6002 Lucerne, Switzerland)

  • Valeriya Potapova

    (Department of Economics, University of Manchester, Manchester M13 9PL, United Kingdom)

  • Klaus R. Schenk-Hoppé

    (Department of Economics, University of Manchester, Manchester M13 9PL, United Kingdom; Department of Finance, Norwegian School of Economics, N-5045 Bergen, Norway)

Abstract

The paper models evolution in pecunia—in the realm of finance. Financial markets are explored as evolving biological systems. Diverse investment strategies compete for the market capital invested in long-lived dividend-paying assets. Some strategies survive and some become extinct. The basis of our paper is that dividends are not exogenous but increase with the wealth invested in an asset, as is the case in a production economy. This might create a positive feedback loop in which more investment in some asset leads to higher dividends which in turn lead to higher investments. Nevertheless, we are able to identify a unique evolutionary stable investment strategy. The problem is studied in a framework combining stochastic dynamics and evolutionary game theory. The model proposed employs only objectively observable market data, in contrast with traditional settings relying upon unobservable investors’ characteristics (utilities and beliefs). Our method is analytical and based on mathematical reasoning. A numerical illustration of the main result is provided.

Suggested Citation

  • Rabah Amir & Igor V. Evstigneev & Thorsten Hens & Valeriya Potapova & Klaus R. Schenk-Hoppé, 2021. "Evolution in pecunia," Proceedings of the National Academy of Sciences, Proceedings of the National Academy of Sciences, vol. 118(26), pages 2016514118-, June.
    • Handle: RePEc:nas:journl:v:118:y:2021:p:e2016514118
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    Cited by:

    1. Hirshleifer, David & Lo, Andrew W. & Zhang, Ruixun, 2023. "Social contagion and the survival of diverse investment styles," Journal of Economic Dynamics and Control, Elsevier, vol. 154(C).
    2. Igor V. Evstigneev & Mohammad Javad Vanaei, 2022. "Evolutionary Behavioural Finance: A Model with Endogenous Asset Payoffs," Economics Discussion Paper Series 2202, Economics, The University of Manchester.
    3. Mikhail Zhitlukhin, 2021. "Capital growth and survival strategies in a market with endogenous prices," Papers 2101.09777, arXiv.org.

    More about this item

    Keywords

    evolutionary finance; evolutionarily stable investment strategies; survival; stochastic dynamics; local stability;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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