Speculation Under Unawareness
32 Pages Posted: 15 Feb 2018 Last revised: 18 Apr 2018
Date Written: March 15, 2018
Abstract
“No trade” theorems establish that, in various trading environments, investors who share a common prior will not engage in speculation, as long as expected utility, Bayesian updating and full awareness are imposed. We relax the last assumption by allowing for asymmetric unawareness and examine under which conditions speculative behavior emerges. We find that if common knowledge is assumed (as in the settings of Aumann [1976] and Milgrom and Stokey [1982]), unawareness cannot generate speculation. This is not true, however, in settings where no common knowledge is assumed, such as speculation in equilibrium (Geanakoplos [1989]) and betting that is always beneficial (Morris [1994]), unless stronger conditions on awareness are imposed.
Keywords: unawareness, trade, speculation, knowledge, common knowledge, bounded perception, awareness
JEL Classification: C70, C72, D80, D82
Suggested Citation: Suggested Citation