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Common Beliefs and the Existence of Speculative Trade

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  • Zvika Neeman

Abstract

This paper shows that if rationality is not common knowledge, the no-trade theorem of Milgrom and Stokey (1982) fails to hold. We adopt Monderer and Samet's (1990) notion of common p-belief and show that when traders entertain doubts about the rationality of other traders, and even if these doubts are very small, arbitrarily large volumes of trade as well as rationality may be common p-belief for a large p. Furthermore, rationality and trade may simultaneously be known to arbitrary large (but finite) degree. The underlying intuition of the model is that, in trade situation, every trader may be rational but may believe tht the others are not fully rational. Thus, rational traders trade with each other, believeing that the other trader might be wrong, while they are right.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1052.

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Date of creation: May 1993
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Handle: RePEc:nwu:cmsems:1052

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  1. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
  2. Samet, Dov, 1990. "Ignoring ignorance and agreeing to disagree," Journal of Economic Theory, Elsevier, vol. 52(1), pages 190-207, October.
  3. Zvika Neeman, 1993. "A Note on Approximating Agreeing to Disagree Results with Common p-Beliefs," Discussion Papers 1029, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Cited by:
  1. Angrisani Marco & Guarino Antonio & Huck Steffen & Larson Nathan C, 2011. "No-Trade in the Laboratory," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-58, April.
  2. Robin Hanson, 2003. "For Bayesian Wannabes, Are Disagreements Not About Information?," Theory and Decision, Springer, vol. 54(2), pages 105-123, March.
  3. Luo, Xiao & Ma, Chenghu, 2003. ""Agreeing to disagree" type results: a decision-theoretic approach," Journal of Mathematical Economics, Elsevier, vol. 39(8), pages 849-861, November.
  4. Barelli, Paulo, 2009. "Consistency of beliefs and epistemic conditions for Nash and correlated equilibria," Games and Economic Behavior, Elsevier, vol. 67(2), pages 363-375, November.

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