Examining Investment Strategies With Evolutionary Game Theory

Year 2024, Volume: 8 Issue: 1, 87 - 115, 28.03.2024

Aras Yolusever , Burak Ünveren , Ercan Eren

Abstract

This study provides a comprehensive analysis of the investment strategies used in stock markets by utilizing evolutionary game theory. The main objective is to investigate the conditions necessary for achieving an evolutionary stable equilibrium, which is crucial for a successful investment strategy and a rational market process. To achieve a stable investment strategy, investors must focus on returns and be wary of yield differences. Yet, empirical observation of this situation can be challenging. Therefore, evolutionary theory is selected as the ideal tool to model emotional states and non-rational behaviors, such as reciprocity, altruism, and selfishness. The study is divided into three parts. The first part presents a literature review on the modeling of investment strategies. In the second part, investment strategies are modeled using evolutionary game theory. Finally, in the last part, a behavioral dimension is added to the model, revealing the difficulty of rational preferences and evolutionary stable balances in the presence of human behavioral preferences. We emphasize the importance of a stable investment strategy dominating the market to achieve an equilibrium state. The study highlights the challenge of achieving rational preferences and evolutionary stable balances, given the behavioral dimension of human preferences.

Keywords

Evolutionary Game Theory, Evolutionary Stable Equilibrium, Replicator Dynamics, Conformism, Investment Straregies

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