Paper: arXiv 2302.13994

Authors: Bernhard K Meister

Abstract

Myopic investors are locally rational decision-makers but globally irrational. Their suboptimal portfolios lag the market. As a consequence, other market participants are provided with profit opportunities. Not subterfuge but constrained optimisation leads to disparities. Four overlapping examples are given. The first case centres on the difference between local and global optimisers and their respective Kelly fractions, the second on isolated versus combined optimisation, the third on the distinction between qualitative and quantitative investor, the fourth on the non-commutative nature of information and the resulting asymmetries.

Complexity vs Empirical Score

  • Math Complexity: 5.5/10
  • Empirical Rigor: 2.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper provides interesting theoretical insights into myopic investment behavior using formal frameworks like Kelly criterion variants and information asymmetry. However, it relies heavily on stylized conceptual examples and lacks empirical validation or backtesting on real-world market data.

Research Flowchart

  flowchart TD
    A[Research Goal: Explain Myopic Investor Suboptimality & Market Opportunities] --> B[Model Constraints: Local vs Global Rationality]
    B --> C[Inputs: Kelly Fractions & Information Structures]
    C --> D[Evaluate 4 Scenarios: Local/Global, Isolated/Combined, Qual/Quant, Non-Commutative Info]
    D --> E[Key Finding: Constrained Optimization Creates Profit Opportunities & Asymmetries]