Beiträge zur Jahrestagung des Vereins für Socialpolitik 2019: 30 Jahre Mauerfall - Demokratie und Marktwirtschaft - Session: Economic Theory - Information and Uncertainty No. G01-V3
I show how irrational ideas and rumors can drive asset prices - not because anyone believes them, but because they are commonly known without being common knowledge. The phenomenon is driven by short-term market participants who are well-informed about the information that others have, and who therefore find it impossible to ignore pieces of news even though they know them to be false, know that others know that they are false, and so on. Informative trading becomes unrationalizable; no information is incorporated into the market price. I discuss implications for how mass media can hurt the informational efficiency of markets.
Speculation informational efficiency multiple equilibria beauty contest common knowledge global games infection contagion