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Money Pumps in the Market

Author

Listed:
  • Ariel Rubinstein
  • Ran Spiegler

Abstract

Agents who employ non-rational choice procedures are often vulnerable to exploitation, in the sense that a profit-seeking trader can offer them a harmful transaction which they will nevertheless accept. We examine the vulnerability of a procedure for deciding whether to buy a lottery: observe another agent who already bought it and buy the lottery if that agent's experience was positive. We show that the exploitation of such agents can be embedded in an inter-temporal market mechanism, in the form of speculative trade in an asset of no intrinsic value. (JEL: D84) (c) 2008 by the European Economic Association.

Suggested Citation

  • Ariel Rubinstein & Ran Spiegler, 2008. "Money Pumps in the Market," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 237-253, March.
    • Handle: RePEc:tpr:jeurec:v:6:y:2008:i:1:p:237-253
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    References listed on IDEAS

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    1. Leeat Yariv & David Laibson, 2004. "Safety in Markets: An Impossibility Theorem for Dutch Books," 2004 Meeting Papers 867, Society for Economic Dynamics.
    2. Ran Spiegler, 2006. "The Market for Quacks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(4), pages 1113-1131.
    3. ,, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
    4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    5. Osborne, Martin J & Rubinstein, Ariel, 1998. "Games with Procedurally Rational Players," American Economic Review, American Economic Association, vol. 88(4), pages 834-847, September.
    6. Osborne, Martin J. & Rubinstein, Ariel, 2003. "Sampling equilibrium, with an application to strategic voting," Games and Economic Behavior, Elsevier, vol. 45(2), pages 434-441, November.
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    Cited by:

    1. Leeat Yariv & David Laibson, 2004. "Safety in Markets: An Impossibility Theorem for Dutch Books," 2004 Meeting Papers 867, Society for Economic Dynamics.
    2. Bianchi, Milo & Jehiel, Philippe, 2015. "Financial reporting and market efficiency with extrapolative investors," Journal of Economic Theory, Elsevier, vol. 157(C), pages 842-878.
    3. Basu, Kaushik, 2010. "A marketing scheme for making money off innocent people: A user's manual," Economics Letters, Elsevier, vol. 107(2), pages 122-124, May.
    4. Szech, Nora, 2011. "Becoming a bad doctor," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 244-257.
    5. Milo Bianchi & Philippe Jehiel, 2012. "Financial reporting and market e¢ ciency with extrapolative investors," Levine's Working Paper Archive 786969000000000451, David K. Levine.
    6. Piccione, Michele & Spiegler, Ran, 2014. "Manipulating market sentiment," Economics Letters, Elsevier, vol. 122(2), pages 370-373.
    7. Berg, Nathan & Biele, Guido & Gigerenzer, Gerd, 2010. "Does consistency predict accuracy of beliefs?: Economists surveyed about PSA," MPRA Paper 26590, University Library of Munich, Germany.
    8. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 709-733, August.
    9. Kaushik Basu, 2009. "A Marketing Scheme for Making Money off Innocent People: A User’s Manual," Working Papers id:2341, eSocialSciences.
    10. de Andrés, Pablo & Arroyo, David & Correia, Ricardo & Rezola, Alvaro, 2022. "Challenges of the market for initial coin offerings," International Review of Financial Analysis, Elsevier, vol. 79(C).

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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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