Self-Fulfilling Prophecies, Quasi Non-Ergodicity and Wealth Inequality

TL;DR

This paper models how public opinion-driven signals and belief updates lead to persistent disagreements and wealth inequality through a quasi-non-ergodic process in an exchange economy.

Contribution

It introduces a novel model linking public opinion, belief dynamics, and wealth inequality via a quasi-non-ergodic process.

Findings

Disagreements persist indefinitely among agents.

Wealth inequality arises from multiplicative wealth dynamics.

Successful bold bets are highly profitable in the model.

Abstract

We construct a model of an exchange economy in which agents trade assets contingent on an observable signal, the probability of which depends on public opinion. The agents in our model are replaced occasionally and each person updates beliefs in response to observed outcomes. We show that the distribution of the observed signal is described by a quasi-non-ergodic process and that people continue to disagree with each other forever. These disagreements generate large wealth inequalities that arise from the multiplicative nature of wealth dynamics which make successful bold bets highly profitable.