Smart Money, Dumb Money, and Learning Type from Price

Heaton , J.B.; Polson, Nick

doi:10.2139/ssrn.1907317

Abstract

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Smart Money, Dumb Money, and Learning Type from Price

J.B. Heaton III

Bartlit Beck Herman Palenchar & Scott LLP

University of Chicago - Booth School of Business

June 2012

Abstract:
We present a simple model of smart money and dumb money. Dumb money tries to learn from market prices whether or not it is dumb. Dumb money's ability to learn depends on its openness to the idea that it may be the dumb money and on its ability to assess the total amount of dumb money in the market. Neither requirement may be met easily in the real world.

Number of Pages in PDF File: 23

Keywords: smart money, dumb money, noise traders, limits of arbitrage, learning, heterogeneous beliefs

JEL Classification: G10, G12

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Date posted: August 9, 2011 ; Last revised: June 15, 2012

Suggested Citation

Heaton, J.B. and Polson, Nick, Smart Money, Dumb Money, and Learning Type from Price (June 2012). Available at SSRN: http://ssrn.com/abstract=1907317 or http://dx.doi.org/10.2139/ssrn.1907317

Contact Information

J.B. Heaton III (Contact Author) Bartlit Beck Herman Palenchar & Scott LLP ( email ) Courthouse Place 54 West Hubbard Street Chicago, IL 60610 United States 312-494-4425 (Phone) 312-494-4440 (Fax)
Nick Polson University of Chicago - Booth School of Business ( email ) 5807 S. Woodlawn Avenue Chicago, IL 60637 United States 773-702-7513 (Phone) 773-702-0458 (Fax)

Abstract

Smart Money, Dumb Money, and Learning Type from Price

J.B. Heaton III

Nick Polson

Date posted: August 9, 2011 ; Last revised: June 15, 2012

Suggested Citation

Contact Information

J.B. Heaton III (Contact Author)

Nick Polson