Evolutionary Game to Model Risk Appetite of Individual Investors

Abstract

‎We present a novel mathematical model of development and progression of investments based on evolutionary game theory‎. ‎Four different investment types in market‎: ‎bank account‎, ‎bond‎, ‎stocks‎, ‎and risky derivatives‎. ‎Despite the relative sincerity of the model‎, ‎it supplies a way to explore the interactions between the different investment types in the market‎. ‎We assume the market is a complete and four assets constitute the total capital market‎. ‎And assume that the three risk-averse individual‎, ‎risk‎- ‎neutral individual and risk-seeking individual enter the market and each individual buys at least two assets‎. ‎We examine the interaction of the two assets and find evolutionary stable strategy in interactions and weights‎. ‎We explore the heard effect on decision making and investment‎.