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Speculation under unawareness

Spyros Galanis ()

Games and Economic Behavior, 2018, vol. 109, issue C, 598-615

Abstract: “No trade” theorems establish that, in various trading environments, investors who share a common prior will not engage in speculation, as long as expected utility, Bayesian updating and full awareness are imposed. We relax the last assumption by allowing for asymmetric unawareness and examine under which conditions speculative behaviour emerges. We find that if common knowledge is assumed (as in the settings of Aumann, 1976 and Milgrom and Stokey, 1982), unawareness cannot generate speculation. This is not true, however, in settings where no common knowledge is assumed, such as speculation in equilibrium (Geanakoplos, 1989) and betting that is always beneficial (Morris, 1994), unless stronger conditions on awareness are imposed.

Keywords: Unawareness; Trade; Speculation; Knowledge; Common knowledge; Bounded perception; Awareness (search for similar items in EconPapers)
JEL-codes: C70 C72 D80 D82 (search for similar items in EconPapers)
Date: 2018
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