Smart Money, Dumb Money, and Learning Type from Price

Posted: 9 Aug 2011 Last revised: 22 Nov 2020

See all articles by J.B. Heaton

J.B. Heaton

One Hat Research LLC

Nick Polson

University of Chicago - Booth School of Business

Date Written: June 1, 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 1, 2012). Available at SSRN: https://ssrn.com/abstract=1907317 or http://dx.doi.org/10.2139/ssrn.1907317

J.B. Heaton (Contact Author)

One Hat Research LLC ( email )

1165 North Clark Street
7th Floor
Chicago, IL 60610
United States

HOME PAGE: http://www.onehatr.com/

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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