On the Evolution of Norms in Strategic
Environments, with Sebastiano della Lena (June 2019)
In a heterogeneous population divided into two cultural groups, we investigate the intergenerational dynamics of norms, modeled as preferences
over actions, as depending on strategic environments. We find that environments with strategic complementarity or substitutability lead to
different long-run norms and horizontal socializations. When players face many games within the same class, under complementarity agents
converge to the same norm and socialization is high, under substitutability norms may diverge or become neutral and socialization is low.
However, for specific games, partial convergence can arise under complementarity, providing an explanation to cultural heterogeneity, and
partial divergence can arise under substitutability.
The Wisdom of the Crowd in Dynamic
Economies, with Filippo Massari (November 2018) Slides
The Wisdom of the Crowd applied to financial markets asserts that prices, an average of agents' beliefs, are more accurate than individual beliefs. However, a market selection argument implies that prices eventually reflect only the beliefs of the most accurate agent. In this paper, we show how to reconcile these alternative points of view. In markets in which agents naively learn from equilibrium prices, a dynamic Wisdom of the Crowd holds. Market participation increases agents' accuracy, and equilibrium prices are more accurate than the most accurate agent. If we replace naive learning with Bayes' rule, this positive result disappears.
Momentum and Reversal in a Financial Market with
Heterogeneity, with Giulio Bottazzi and Daniele Giachini (February 2018)
This paper investigates whether short-term momentum and long-term reversal may emerge from the wealth reallocation process taking place in
speculative markets. We assume that there are two classes of investors who trade long-lived assets by holding constantly rebalanced portfolios
based on their beliefs. Provided beliefs, and thus portfolios, are sufficiently diversified, all investors survive in the long-run and, due to
waves of mispricing, the resulting equilibrium returns exhibit long-term reversal. If, moreover, asset dividends are positively correlated,
investors’ profitable trades become positively correlated too, thus generating short-term momentum in equilibrium returns. We use the model to
replicate the performance of the Winners and Losers portfolios highlighted by the empirical literature and to provide insights on how to
improve upon them. Finally, we show that dividend positive autocorrelation is positively related to momentum and negatively related to
reversal while diversity of beliefs is positively related to both momentum and reversal.
Drift criteria for persistence of discrete stochastic processes on the line, with Giulio Bottazzi (December 2015)
We provide sufficient conditions for the persistence or transience of stochastic processes on the line based on the sign of the conditional drift.
Our findings extend previous results in the literature to the large class of discrete time processes with bounded increments.