nep-evo 2007-10-20 papers

on Evolutionary Economics

Issue of 2007‒10‒20
two papers chosen by
Matthew Baker
City University of New York

On the Evolution of Investment Strategies and the Kelly Rule – A Darwinian Approach By Terje Lensberg; Klaus Reiner Schenk-Hoppe
Anomalies In Intertemporal Choice? By Anke Gerber; Kirsten I.M. Rohde

On the Evolution of Investment Strategies and the Kelly Rule – A Darwinian Approach

By:	Terje Lensberg (Norwegian School of Economics and Business Administration); Klaus Reiner Schenk-Hoppe (University of Leeds, Business School and School of Mathematics)
Abstract:	This paper complements theoretical studies on the Kelly rule in evolutionary finance by studying a Darwinian model of selection and reproduction in which the diversity of investment strategies is maintained through genetic programming. We find that investment strategies which optimize long-term performance can emerge in markets populated by unsophisticated investors. Regardless whether the market is complete or incomplete and whether states are i.i.d. or Markov, the Kelly rule is obtained as the asymptotic outcome. With pricedependent rather than just state-dependent investment strategies, the market portfolio plays an important role as a protection against severe losses in volatile markets.
Keywords:	Evolutionary finance, portfolio choice, asset pricing, genetic programming
JEL:	G11 C63
Date:	2006–12
URL:	http://d.repec.org/n?u=RePEc:chf:rpseri:rp0638&r=evo

Anomalies In Intertemporal Choice?

By:	Anke Gerber (University of Zurich and Swiss Banking Institute); Kirsten I.M. Rohde (Erasmus University, Department of Applied Economics, The Netherlands)
Abstract:	This paper argues that observations of non-stationary choice behavior need not necessarily imply specific properties of the individual’s discount function. As we show, the observed “anomalies” in intertemporal choice can alternatively be explained by an individual’s perception of the risk that is involved whenever an outcome is to be received in the future. This risk may concern the size of the actual outcome or the endowment consumption stream to which the outcome is added. Both types of uncertainty naturally appear in the context of intertemporal choice and both are difficult to control in experiments. We show how relative degrees of changes in risk over time can predict choices.
Keywords:	Hyperbolic Discounting, Decreasing Impatience, Increasing impatience, Risk, Magnitude Effect, Gain-Loss Asymmetry
JEL:	D91 D81
Date:	2007–04
URL:	http://d.repec.org/n?u=RePEc:chf:rpseri:rp0712&r=evo

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