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Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality

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  • Roger Farmer
  • Jean-Philippe Bouchaud

Abstract

We construct a model of an exchange economy in which agents trade assets contingent on an observable signal, the probability of which depends on public opinion. The agents in our model are replaced occasionally and each person updates beliefs in response to observed outcomes. We show that the distribution of the observed signal is described by a quasi-non-ergodic process and that people continue to disagree with each other forever. These disagreements generate large wealth inequalities that arise from the multiplicative nature of wealth dynamics which make successful bold bets highly profitable.

Suggested Citation

  • Roger Farmer & Jean-Philippe Bouchaud, 2020. "Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality," NBER Working Papers 28261, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28261
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Michele Vodret & Iacopo Mastromatteo & Bence Tóth & Michael Benzaquen, 2022. "Microfounding GARCH Models and Beyond: A Kyle-inspired Model with Adaptive Agents," Working Papers hal-03797251, HAL.
    3. Michele Vodret & Iacopo Mastromatteo & Bence Toth & Michael Benzaquen, 2022. "Microfounding GARCH Models and Beyond: A Kyle-inspired Model with Adaptive Agents," Papers 2206.06764, arXiv.org.

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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • G0 - Financial Economics - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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