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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.

Suggested Citation

  • Zvika Neeman, 1993. "Common Beliefs and the Existence of Speculative Trade," Discussion Papers 1052, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1052
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    References listed on IDEAS

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    1. D. Samet, 1987. "Ignoring Ignorance and Agreeing to Disagree," Discussion Papers 749, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Kiminori Matsuyama, 1993. "Custom versus fashion: path-dependence and limit cycles in a random matching game," Discussion Paper / Institute for Empirical Macroeconomics 82, Federal Reserve Bank of Minneapolis.
    3. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
    4. Samet, Dov, 1990. "Ignoring ignorance and agreeing to disagree," Journal of Economic Theory, Elsevier, vol. 52(1), pages 190-207, October.
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    Cited by:

    1. Robin Hanson, 2003. "For Bayesian Wannabes, Are Disagreements Not About Information?," Theory and Decision, Springer, pages 105-123.
    2. Renou, Ludovic & Schlag, Karl H., 2010. "Minimax regret and strategic uncertainty," Journal of Economic Theory, Elsevier, pages 264-286.
    3. Angrisani Marco & Guarino Antonio & Huck Steffen & Larson Nathan C, 2011. "No-Trade in the Laboratory," The B.E. Journal of Theoretical Economics, De Gruyter, pages 1-58.
    4. 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.
    5. Kukushkin, Nikolai S., 2015. "Robert Louis Stevenson's Bottle Imp: A strategic analysis," MPRA Paper 64639, University Library of Munich, Germany.
    6. Romeo Matthew Balanquit, 2016. "Common Belief Revisited," UP School of Economics Discussion Papers 201608, University of the Philippines School of Economics.
    7. 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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