23 Pages Posted: 9 Aug 2011 Last revised: 15 Jun 2012
Date Written: June 2012
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: Suggested Citation