Survival of the Fittest on Wall Street

This paper studies an application of a Darwinian theory of portfolioselection to stocks listed in the Dow Jones Industrial Average (DJIA).We analyze numerically the long-run outcome of the competition offix-mix portfolio rules in a stock market with actual DJIA dividends.In the model seemingly rational strategies can do very poorly againstseemingly irrational strategies. Moreover, the interaction of strategiescan lead to stochastic time series of asset prices that do not converge.The simulations also show that the evolutionary portfolio rule discovered in Hens and Schenk-Hoppe (2004) will eventually hold total market wealth in competition with fix-mix portfolio rules derived from mean-variance optimization, maximum growth theory and behavioral finance. According to this evolutionary rule, portfolio weights should be proportional to the expected relative dividends of the assets. Asan implication asset prices converge to expected relative dividends.