"Do Markets Favor Agents Able to Make Accurate Predictions?"

Presented by Professor Alvaro Sandroni

Professor Alvaro Sandroni presented his paper, "Do Markets Favor Agents Able to Make Accurate Predictions?" at the Kellogg School on January 28, 2004, with a reception afterward. His paper earned the Stanley Reiter Best Paper Award in 2003.

Paper Abstract: Blume and Easley (1992) show that if agents have the same savings rule, those who maximize the expected logarithm of next period's outcomes will eventually hold all wealth (i.e., are "most prosperous"). However, if no agent adopts this rule then the most prosperous are not necessarily those who make the most accurate predictions. Thus, agents who make inaccurate predictions need not be driven out of the market. In this paper, it is shown that, among agents who have the same intertemporal discount factor (and who choose savings endogenously), the most prosperous are those who make accurate predictions. Hence, convergence to rational expectations obtains because agents who make inaccurate predictions are driven out of the market.

The Stanley Reiter Best Paper Award is presented each year for the article judged to be best from among those published by the Kellogg faculty in the preceding four calendar years.