Publication Date
3-2019
Abstract
One of the challenges in foundations of finance is the so-called "no trade theorem" paradox: if an expert trader wants to sell some stock, that means that this trader believes that this stock will go down; however, the very fact that another expert trader is willing to buy it means that this other expert believes that the stock will go up. The fact that equally good experts have different beliefs should dissuade the first expert from selling -- and thus, trades should be very rare. However, in reality, trades are ubiquitous. In this paper, we show that a detailed application of decision theory solves this paradox and explains how a trade can be beneficial to both seller and buyer. This application also explains a known psychological fact -- that depressed people are usually more risk-averse.
Comments
Technical Report: UTEP-CS-19-29
Published in Applied Mathematical Sciences, 2019, Vol. 13, No. 8, pp. 397-404.