Evolution in Pecunia

Rabah Amir, Igor Evstigneev, Thorsten Hens, Valeriya Potapova, Klaus Schenk-Hoppe

Research output: Contribution to journalArticlepeer-review

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 novelty 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 leads 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.
Original languageEnglish
Article number e2016514118
Number of pages8
JournalProceedings of the National Academy of Sciences
Volume 118
Issue number26
Early online date25 Jun 2021
DOIs
Publication statusPublished - 29 Jun 2021

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