A Peer-based Model of Fat-tailed Outcomes

Abstract

It is well known that the distribution of returns from various financial instruments are leptokurtic, meaning that the distributions have "fatter tails" than a Normal distribution, and have skew toward zero. This paper presents a graceful micro-level explanation for such fat-tailed outcomes, using agents whose private valuations have Normally-distributed errors, but whose utility function includes a term for the percentage of others who also buy.