Smart Money, Dumb Money, and Learning Type from Price

23 Pages Posted: 9 Aug 2011 Last revised: 15 Jun 2012

J.B. Heaton

Bartlit Beck Herman Palenchar & Scott LLP

Nick Polson

University of Chicago - Booth School of Business

Date Written: 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.

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

JEL Classification: G10, G12

Suggested Citation

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

J.B. Heaton (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)

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