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Darwinian adverse selection1

Darwinian adverse selection1 We develop a model to study the role of individual rationality in economics and biology. The model’s agents differ continuously in their ability to make rational choices. The agents’ objective is to ensure their individual survival over time or, equivalently, to maximize profits. In equilibrium, however, individually rational agents who maximize their objective survival probability are, individually and collectively, eliminated by the forces of competition. Instead of individual rationality, there emerges a unique distribution of irrational players who are individually not fit for the struggle of survival. The selection of irrational players over rational ones relies on the fact that all rational players coordinate on the same optimal action, which leaves them collectively undiversified and thus vulnerable to aggregate risks. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Algorithmic Finance IOS Press

Darwinian adverse selection1

Algorithmic Finance , Volume 5 (1-2): 6 – Jan 1, 2016

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References (25)

Publisher
IOS Press
Copyright
Copyright © 2016 IOS Press and the authors. All rights reserved
ISSN
2158-5571
eISSN
2157-6203
DOI
10.3233/AF-160056
Publisher site
See Article on Publisher Site

Abstract

We develop a model to study the role of individual rationality in economics and biology. The model’s agents differ continuously in their ability to make rational choices. The agents’ objective is to ensure their individual survival over time or, equivalently, to maximize profits. In equilibrium, however, individually rational agents who maximize their objective survival probability are, individually and collectively, eliminated by the forces of competition. Instead of individual rationality, there emerges a unique distribution of irrational players who are individually not fit for the struggle of survival. The selection of irrational players over rational ones relies on the fact that all rational players coordinate on the same optimal action, which leaves them collectively undiversified and thus vulnerable to aggregate risks.

Journal

Algorithmic FinanceIOS Press

Published: Jan 1, 2016

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