EVOLUTION AND MARKET BEHAVIOR

In a conventional asset market model we study the evolutionary process generated by wealth flows between investors. Asymptotic behavior of our model is completely determined by the investors' expected growth rates of wealth share. Investment rules are more or less "fit" depending upon the value of this expectation, and more fit rules survive in the market at the expense of the less fit. Using this criterion we examine the long run behavior of asset prices and the common belief that the market selects for rational investors. We find that fit rules need not be rational, and rational rules not be fit. Finally, we investigate how the market selects over various adaptive decision rules. © 1992.