The Importance of Being Conservative : An Illustration of Natural Selection in a Futures Market

With an aversion to losses, there are some traders in financial markets who are not overly aggressive in bidding too high and some traders who are not overly aggressive in selling at too low of a price. This paper shows in an evolutionary model of natural selection within the context of a futures market that as long as these conservative traders have some positive probability (however small) of making an accurate prediction of the spot price, their presence ensures the convergence to an efficient market. This result is distinct from previous related research. Furthermore, although such conservative traders are not aggressive nor do they always participate in the market, in the long run they not only survive but eventually increase their share of aggregate wealth