Market Selection in Large Economies: A Matter of Luck

Abstract

Within a general equilibrium model with a continuum of traders, we investigate the Market Selection Hypothesis (MSH) - markets select traders with more accurate beliefs. We find, contrary to known results for economies with (only) finitely many traders, that risk attitudes affect survival and that markets might select against traders with accurate beliefs. Remarkably, even in these cases, asymptotic equilibrium prices reflect accurate beliefs. Thus, unlike known violations of MSH, we corroborate Freedman’s conjecture that market selection forces induce rational expectations.