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Live fast, die young

Author

Listed:
  • Elyes Jouini

    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Clotilde Napp

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

Irrational agents are driven out of the market. This should favor learning: Irrational agents observing that rational agents are being more successful should adopt rational beliefs. We show that the threat of elimination is not sufficient to push agents toward rationality: A shorter “life” might be more rewarding than a longer one. Even if they are eliminated in the long run, irrational agents might rationally stay irrational in the sense that their ex-ante and ex-post welfare levels over their whole life are higher than (1) the welfare level that they would reach if they adopted rational expectations, (2) the welfare level reached by the otherwise identical (same initial wealth and same risk aversion) rational agents, (3) the welfare level that they would have if they were given the optimal allocation of the rational agent. Threat of elimination is not sufficient to push irrational agents toward rationality, and rational and surviving agents’ performances are not sufficiently high to generate learning through an adaptive process based on imitation of successful behaviors. A numerical illustration is provided.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Elyes Jouini & Clotilde Napp, 2015. "Live fast, die young," Post-Print halshs-01250247, HAL.
    • Handle: RePEc:hal:journl:halshs-01250247
    DOI: 10.1007/s00199-015-0894-7
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    Other versions of this item:

    • Elyès Jouini & Clotilde Napp, 2016. "Live fast, die young," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 265-278, June.

    References listed on IDEAS

    as
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    7. Elyès Jouini & Clotilde Napp & Yannick Viossat, 2013. "Evolutionary Beliefs and Financial Markets," Review of Finance, European Finance Association, vol. 17(2), pages 727-766.
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    11. repec:dau:papers:123456789/5772 is not listed on IDEAS
    12. Hongjun Yan, 2008. "Natural Selection in Financial Markets: Does It Work?," Management Science, INFORMS, vol. 54(11), pages 1935-1950, November.
    13. repec:dau:papers:123456789/78 is not listed on IDEAS
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    Cited by:

    1. Giulio Bottazzi & Daniele Giachini, 2022. "Strategically Biased Learning In Market Interactions," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 25(02n03), pages 1-18, March.
    2. Arthur Beddock & Elyès Jouini, 2021. "Live fast, die young: equilibrium and survival in large economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(3), pages 961-996, April.
    3. 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.

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    More about this item

    Keywords

    Irrational beliefs Rational expectations Learning Market elimination;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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