Darwinian selection does not eliminate irrational traders

This paper offers a counter-argument to Friedman's (In: Essays in Positive Economics, University of Chicago Press, Chicago, 1953) claim that irrationa l agents are bound to be eliminated by market forces. Consider a financial market where some traders irrationally over- or under-estimate the dividend flow. We show that this irrationality can enhance their bargaining power, so that these agents can obtain larger gains from trade than rational agent s. We analyze the stochastic evolutionary dynamics of the fraction of agent s who are irrational, and show that they may well survive in the long term. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: D8 4; G12; G14.