Abstract
We have built models of speculative futures trading based upon inconsistent priors, analyzing games of inconsistent incomplete information. These models have assumed that the inconsistent priors are themselves common knowledge. In this paper, we explore the game-theoretic implications of treating doubly inconsistent incomplete information, in that inconsistent priors are private information, and traders attach inconsistent assessments to the probability that a trader will be an optimist.
The result is not arbitrary: the logic of a separating equilibrium can be specified via backwards induction. It is unlikely that subgame-perfect equilibria will exhibit pooling. The volume of speculative trading is reduced by informational constraints, but a sense is specified in which no ex ante agreed-upon Pareto improvements over separating equilibrium behavior can satisfy the information constraints.
Reinhard Selten first suggested the topic of this paper, while the authors were visiting the Center for Interdisciplinary Research, Bielefeld, Germany. We are grateful for the Center’s support, and for stimulating suggestions from Joel Sobel and Eric van Damme.
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Harstad, R.M., Phlips, L. (1997). Futures Market Contracting When You Don’t Know Who the Optimists Are. In: Albers, W., Güth, W., Hammerstein, P., Moldovanu, B., van Damme, E. (eds) Understanding Strategic Interaction. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-60495-9_6
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