22. Dynamics of the Financial Markets and the Wealth Concentration

The concentration of investors’ wealth is one of the most important factors shaping their investment strategies. It is reasonable to assume that it can impact the dynamics of financial markets, leading potentially to many undesirable phenomena such as lack of efficiency and collusions. Varying rates of return on investments and among investors over long periods of time favor wealth concentration. Inclusion of other factors such as skill and experience leading potentially to uniformization of behavior through learning cannot eliminate the phenomenon due to the stochastic nature of financial markets. We show that the dynamics of the market can significantly impact how quickly wealth concentration takes place. We present a simple model of wealth concentration among investors to assess the impact of randomness on the distribution of wealth in the function of time. We demonstrate that random fluctuations alone can lead to the accelerated, and under some conditions unlimited, concentration of wealth resulting in a lack of market efficiency.