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Nicolas Quérou (Saint-Etienne). Economics Colloquia.

Event details of Ignorance is bliss: Trading between agents with differing degrees of rationality
Date 1 December 2005
Time 11:15 -12:15

Nicolas Quérou (Saint-Etienne)

Ignorance is bliss: Trading between agents with differing degrees of rationality

Abstract
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We study the influence of differing degrees of individual rationality on trading behaviors and outcomes. We consider a two sided incomplete information trading market with a large population of buyers and m sellers.
Rather than assuming that the adjustment of prices is done by some fictitious player, we assume that sellers price individually and update their own idea of the state of the market. Each buyer learns which shop to choose by reinforcement (according to the information gathered during previous purchases). Sellers have a degree of rationality which differs from that of buyers. Each seller has his own idea of the distribution of buyers' prices that he modifies over the process. Given his view of the distribution he chooses the best price to offer to the buyer at each round. The precise question that we pose is the following: can more ignorant agents take advantage of less ignorant ones? Contrary to the generally received wisdom, we show that this maybe the case. People like DeLong, Kyle and others have shown that less "rationality" may lead to higher profits, but they are the exceptions. The main result states conditions under which the propensities of all buyers to choose the seller with the best optimal price converge to 1.

In association with the Tinbergen Institute.

Organisers:

  • Franc Klaassen (AE)
  • Maurice Bun (KE)
  • Aljaz Ule (AE/CREED)
  • Florian Wagener (KE/CeNDEF)

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