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We study the co-evolution of asset prices and individual wealth in a financial market with an arbitrary number of heterogeneous boundedly rational investors. Using wealth dynamics as a selection device we are able to characterize the long run market outcomes, i.e., asset returns and wealth...
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The wisdom of the crowd applied to financial markets asserts that prices represent a consensus belief that is more accurate than individual beliefs. However, a market selection argument implies that prices eventually reflect only the beliefs of the most accurate agent. In this paper, we show how...
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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...
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