Chapter

Rationality and Selection in Asset Markets

Lawrence E. Blume and David Easley

in The Economy as an Evolving Complex System, III

Published in print October 2005 | ISBN: 9780195162592
Published online October 2011 | e-ISBN: 9780199850495 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780195162592.003.0004

Series: Santa Fe Institute Studies on the Sciences of Complexity

Rationality and Selection in Asset Markets

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This chapter examines the implications of trader rationality for the price behavior of financial assets. It argues that rationality imposes few constraints on asset prices. Nonetheless, the market as a whole may in effect learn by transferring wealth across traders with different beliefs, and this market learning may have long-run asset price implications. This finding complements the contribution of Farmer et al. by arguing that it is the interaction mechanism rather than specific agent behaviors that drive the general features of asset price processes.

Keywords: trader rationality; financial assets; Farmer; asset price processes

Chapter.  6780 words. 

Subjects: Economic Systems

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