Dmitry Lubensky and Doug Smith: Learning from Speculating and the No Trade Theorem: "To overcome the no-trade theorems of Aumann (1976) and others, models of speculative trade have relied on agents that do not maximize expected wealth (noise traders)...
...We develop an overlapping generations model in which rational wealth-maximizing speculators with a common prior trade a common value asset based only on private information. The rationale for trade is experimentation: an agent that trades learns about her type, exiting if it is low and continuing to benefit from future trades if it is high. We demonstrate that the learning motive always overcomes adverse selection, regardless of the rate of learning or the benefit of being a high type, generating a substantial volume of purely speculative trade. In a single period snapshot the no trade theorem would ensue, and observed trade is attributed to younger cohorts who appear as noise traders by entering unprofitable trades...
#shouldread
