Financial Markets: Behavioral Equilibrium and Evolutionary Dynamics

We present a new model of financial markets that studies the evolution of wealth

among investment strategies. An investment strategy can be generated by maximizing utility

given some expectations or by behavioral rules. The only requirement is that any investment strategy

is adapted to the information filtration. The model has the mathematical structure of a random dynamical system.

We solve the model by characterizing evolutionary properties of investment strategies (survival, evolutionary stability, dominance).

It turns out that only a fundamental strategy investing according to expected relative dividends satisfies these evolutionary criteria.