Social Transmission Bias and Cultural Evolution in Financial Markets
The thoughts and behaviors of financial market participants depend upon adopted cultural traits, including information signals, beliefs, strategies, and folk economic models. Financial traits compete to survive in the human population, and are modified in the process of being transmitted from one agent to another. These cultural evolutionary processes shape market outcomes, which in turn feed back into the success of competing traits. This evolutionary system is studied in an emerging paradigm, new evolutionary finance. In this paradigm, social transmission biases determine the evolution of financial traits in the investor population. It considers an enriched set of cultural traits, both selection on traits and mutation pressure, and market equilibrium at different frequencies. Other key ingredients of the paradigm include psychological bias, social network structure, information asymmetries, and institutional environment.
We thank participants at the Conference on Evolutionary Models of Financial Markets, MIT Laboratory for Financial Engineering (virtual), June 2020, and especially the discussant, Simon Levin, for insightful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.