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Money Pumps in the Market

  • Ariel Rubinstein
  • Ran Spiegler

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.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 6 (2008)
Issue (Month): 1 (03)
Pages: 237-253

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Handle: RePEc:tpr:jeurec:v:6:y:2008:i:1:p:237-253
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  1. 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.
  2. David Laibson & Leeat Yariv, 2007. "Safety in Markets: An Impossibility Theorem for Dutch Books," Levine's Bibliography 122247000000001746, UCLA Department of Economics.
  3. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  4. Ran Spiegler, 2005. "Competition over Agents with Boundedly Rational Expectations," Levine's Bibliography 122247000000000535, UCLA Department of Economics.
  5. Martin J. Osborne & Ariel Rubinstein, 1997. "Games with Procedurally Rational Players," Department of Economics Working Papers 1997-02, McMaster University.
  6. Ran Spiegler, 2006. "The Market for Quacks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1113-1131.
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