Journal of Evolutionary Economics

, Volume 23, Issue 3, pp 641–661 | Cite as

Selection in asset markets: the good, the bad, and the unknown

  • Giulio Bottazzi
  • Pietro DindoEmail author
Regular Article


In this paper, we use a series of simple examples to illustrate how wealth-driven selection works in a market for Arrow securities. Our analysis delivers both a good and a bad message. The good message is that, when traders invest constant fractions of their wealth in each asset and have equal consumption rates, markets are informationally efficient: the best informed agent is rewarded and asset prices eventually reflect this information. However, and this is the bad message, when asset demands are not constant fractions of wealth but dependent upon prices, markets might behave sub-optimally. In this case, asymptotic prices depend on preferences and beliefs of the whole ecology of traders and do not, in general, reflect the best available information. We show that the key difference between the two cases lies in the local, i.e. price dependent, versus global nature of wealth-driven selection.


Market selection Evolutionary Finance Informational efficiency Asset pricing CRRA preferences 

JEL Classifications

D50 D80 G11 G12 



We acknowledge financial support from the Institute for New Economic Thinking, INET inaugural grant #220 and the European Commission 6th FP Project DIME (Contract CIT3-CT-2005-513396). All usual disclaimers apply.


  1. Amir R, Evstigneev I, Hens T, Schenk-Hoppé K (2005) Market selection and survival of investment strategies. J Math Econ 41:105–122CrossRefGoogle Scholar
  2. Anufriev M, Bottazzi G (2010) Market equilibria under procedural rationality. J Math Econ 46:1140–1172CrossRefGoogle Scholar
  3. Anufriev M, Dindo P (2010) Wealth-driven selection in a financial market with heterogeneous agents. J Econ Behav Organ 73:327–358CrossRefGoogle Scholar
  4. Anufriev M, Bottazzi G, Pancotto F (2006) Equilibria, stability and asymptotic dominance in a speculative market with heterogeneous agents. J Econ Dyn Control 30:1787–1835CrossRefGoogle Scholar
  5. Blume L, Easley D (1992) Evolution and market behavior. J Econ Theory 58:9–40CrossRefGoogle Scholar
  6. Blume L, Easley D (2006) If you are so smart why aren’t you rich? Belief selection in complete and incomplete markets. Econometrica 74:929–966CrossRefGoogle Scholar
  7. Blume L, Easley D (2010) Heterogeneity, selection, and wealth dynamics. Ann Rev Econ 2:425–450CrossRefGoogle Scholar
  8. Bottazzi G, Dindo P (2010) Evolution and market behavior with endogenous investment rules. LEM Working Paper 2010-20. Scuola Superiore Sant’Anna, PisaGoogle Scholar
  9. Breiman L (1961) Optimal gambling systems for favorable games. Proceedings of the 4th Berkley symposium on mathematical statistics and probability 1:63–68Google Scholar
  10. Evstigneev I, Hens T, Schenk-Hoppé K (2008) Globally evolutionary stable portfolio rules. J Econ Theory 140:197–228CrossRefGoogle Scholar
  11. Evstigneev I, Hens T, Schenk-Hoppé K (2009) Evolutionary finance. In: Hens T , Schenk-Hoppé K (eds) Handbook of financial markets: dynamics and evolution. North-Holland (Handbooks in Economics Series)Google Scholar
  12. Hommes C (2006) Heterogeneous agent models in economics and finance. In: Judd K, Tesfatsion L (eds) Handbook of computational economics, vol 2. Agent-based computational economics. North-Holland Handbooks in Economics Series, AmsterdamGoogle Scholar
  13. Kelly J (1956) A new interpretation of information rates. Bell Syst Tech J 35:917–926Google Scholar
  14. LeBaron B (2006) Agent-based computational finance. In: Judd K, Tesfatsion L (eds) Handbook of computational economics, vol 2. Agent-based computational economics. North-Holland (Handbooks in Economics Series)Google Scholar
  15. Nelson R, Winter S (2002) Evolutionary theorizing in economics. J Econ Perspect 16:23–46CrossRefGoogle Scholar
  16. Sandroni A (2000) Do markets favor agents able to make accurate predictions. Econometrica 68(6):1303–1341CrossRefGoogle Scholar
  17. Sandroni A (2005) Market selection when markets are incomplete. J Math Econ 41:91–104CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Istituto di EconomiaScuola Superiore Sant’Anna, Piazza Martiri della Libertà 33PisaItaly
  2. 2.Dipartimento di Economia e ManagementUniversità di Pisa, Via C.Ridolfi 10PisaItaly

Personalised recommendations