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Is beauty contagious? How higher-order uncertainty can drive asset prices

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  • Jann, Ole

Abstract

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.

Suggested Citation

  • Jann, Ole, 2019. "Is beauty contagious? How higher-order uncertainty can drive asset prices," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203590, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc19:203590
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    More about this item

    Keywords

    Speculation; informational efficiency; multiple equilibria; beauty contest; common knowledge; global games; infection; contagion;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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