Citation

Discussion Paper Details

Please find the details for DP15573 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality

Author(s): Jean-Philippe Bouchaud and Roger E A Farmer

Publication Date: December 2020

Keyword(s):

Programme Area(s): Financial Economics

Abstract: We construct a model where people trade assets contingent on an observable signal that reflects public opinion. The agents in our model are replaced occasionally and each person updates beliefs in response to observed outcomes. We show that the distribution of the observed signal is described by a quasi non-ergodic process and that people continue to disagree with each other forever. Our model generates large wealth inequalities that arise from the multiplicative nature of wealth dynamics which makes successful bold bets highly profitable. The flip side of this statement is that unsuccessful bold bets are ruinous and lead the person who makes such bets into poverty. People who agree with the market belief have a low expected subjective gain from trading. People who disagree may either become spectacularly rich, or spectacularly poor.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15573

Bibliographic Reference

Bouchaud, J and Farmer, R. 2020. 'Self-Fulfilling Prophecies, Quasi Non-Ergodicity & Wealth Inequality'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15573