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Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?
 Journal of Finance
, 1997
"... In a duopoly model of informed speculation, we show that overconfidence may strictly dominate rationality since an overconfident trader may not only generate higher expected profit and utility than his rational opponent, but also higher than if he were also rational. This occurs because overconfiden ..."
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Cited by 173 (2 self)
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In a duopoly model of informed speculation, we show that overconfidence may strictly dominate rationality since an overconfident trader may not only generate higher expected profit and utility than his rational opponent, but also higher than if he were also rational. This occurs because overconfidence acts like a commitment device in a standard Cournot duopoly. As a result, for some parameter values the Nash equilibrium of a twofund game is a Prisoner's Dilemma in which both funds hire overconfident managers. Thus, overconfidence can persist and survive in the long run. 2 The rational expectations hypothesis implies that economic agents make decisions as though they know a correct probability distribution of the underlying uncertainty. According to the traditional view (Alchian (1950) and Friedman (1953)), the rational expectations hypothesis is empirically plausible because rational beliefs are better able to survive the market test than irrational beliefs. Yet, the empirical liter...
Evolutionary Game Dynamics in Finite Populations
, 2004
"... We introduce a model of stochastic evolutionary game dynamics in finite populations which is similar to the familiar replicator dynamics for infinite populations. Our focus is on the conditions for selection favoring the invasion and/or fixation of new phenotypes. For infinite populations, there are ..."
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Cited by 96 (14 self)
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We introduce a model of stochastic evolutionary game dynamics in finite populations which is similar to the familiar replicator dynamics for infinite populations. Our focus is on the conditions for selection favoring the invasion and/or fixation of new phenotypes. For infinite populations, there are three generic selection scenarios describing evolutionary game dynamics among two strategies. For finite populations, there are eight selection scenarios. For a fixed payoff matrix a number of these scenarios can occur for different population sizes. We discuss several examples with unexpected behavior.
Simple and clever decision rules for a model of evolution, Econ
 Letters
, 1998
"... Under the decision rule specified by Kandori, Mailath, and Rob (1993), myopic adjustment can lead to surprising results, including coordination on strictly dominated strategies. We show that under an alternative decision rule, convergence to Nash equilibrium is guaranteed. Moreover, if rare mutation ..."
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Cited by 12 (1 self)
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Under the decision rule specified by Kandori, Mailath, and Rob (1993), myopic adjustment can lead to surprising results, including coordination on strictly dominated strategies. We show that under an alternative decision rule, convergence to Nash equilibrium is guaranteed. Moreover, if rare mutations are introduced, risk dominant equilibria always correspond to long run equilibria.
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"... ed exo ine agents who recurrently play a against each other agent in the n a classical result, Kandori et al. f the bilateral game is a 2×2 is such that strategies leading to ts coordinate on riskdominant he pre lt gave ilds on The KMR model can be readily interpreted as a model of mimicked.1 In a ..."
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ed exo ine agents who recurrently play a against each other agent in the n a classical result, Kandori et al. f the bilateral game is a 2×2 is such that strategies leading to ts coordinate on riskdominant he pre lt gave ilds on The KMR model can be readily interpreted as a model of mimicked.1 In a framework with memory, the rule will specify to imitate the action which has led to highest payoffs in remembered experience.2 A standard element in learningmodels is the presence of exogenous inertia (see e.g. Samuelson, 1994 or Kandori and Rob, 1995), defined as an exogenously given probability 0≤ρ<1 that each single agent is notimitation (see KMR, p.31; Rhode and Stegeman, 1996; Sandholm, 1998) where agents mimic the actions which led to highest payoffs in the last period. In this note we consider exactly such a framework and endow agents with bounded memory, hence allowing them to make use of the information gained in the most recent periods of play. Agents remember all actions and payoffs observed in the last K≥0 periods of play in addition to the current one. such that aNc, dNb, aNd, and a+b<c+d. Hence, (P,P) and (R,R) are strict Nash equilibria, (P,P) is Pareto efficient and (R,R) is risk dominant. This is the most interesting case.The imitation rule used in KMR can be d best”, where simply the action leading to