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We examine the survival of nonrational investors in an evolutionary game model with a population dynamic for a large economy. The dynamic indicates that the growth rate of wealth accumulation drives the evolutionary process. We focus our analysis on the survival of overconfidence and investor sentiment. We find that underconfidence or pessimism cannot survive, but moderate overconfidence or optimism can survive and even dominate, particularly when the fundamental risk is large. These findings provide new empirical implications for the survivability of active fund management. Our results lend support to the relevance of the psychology of investors in studying financial markets. Journal of Economic Literature Classification Numbers: G10, G14. C 2001 Academic Press

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We examine two hypotheses to explain stock mispricing: (a) the money illusion hypothesis (Modigliani and Cohn (1979)) and (b) the resale option hypothesis (Scheinkman and Xiong (2003)). We find that the money illusion hypothesis may explain the level, but not the volatility of mispricing in the US market. By contrast, the stock resale option hypothesis, which stems from heterogeneous beliefs about future dividend growth rates and short-sales constraints, can explain both the level and the volatility of mispricing. The evidence suggests that while the two hypotheses complement each other in explaining the level of mispricing, the resale option hypothesis provides a more coherent explanation for asset price bubbles, in which extraordinarily high price levels are often accompanied by excessive volatility and frenzied trading.JEL classification: E31, E44, G12, G14