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
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, G12working papers series
Date posted: August 9, 2011 ; Last revised: June 15, 2012
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