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Money Pumps in the Market

  • Ariel Rubinstein
  • Rani 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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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000941.

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Date of creation: 31 Dec 2005
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Handle: RePEc:cla:levrem:122247000000000941
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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. Spiegler, Ran, 2006. "Competition over agents with boundedly rational expectations," Theoretical Economics, Econometric Society, vol. 1(2), pages 207-231, June.
  3. Osborne, M-J & Rubinstein, A, 1997. "Games with Procedurally Rational Players," Papers 4-97, Tel Aviv.
  4. Ran Spiegler, 2006. "The Market for Quacks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1113-1131.
  5. David Laibson & Leeat Yariv, 2007. "Safety in Markets: An Impossibility Theorem for Dutch Books," Levine's Bibliography 122247000000001746, UCLA Department of Economics.
  6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
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