Financial bubbles from an epistemic viewpoint

Absztrakt (kivonat)

In the realm of games of incomplete information, modeling the beliefs among multiple agents presents significant challenges, especially when considering belief hierarchies — agents’ beliefs about others’ beliefs, and so forth. Harsányi’s (1967) introduction of types offers a notion to navigate these complexities, representing agents’ beliefs through a type function. This research aims to adapt the type space model to the phenomenon of financial bubbles, a concept that, surprisingly, lacks a rigorous mathematical definition in existing literature. We seek to formally define financial bubbles and establish a common prior that facilitates the emergence of such a type space. By analyzing the conditions necessary and sufficient for a financial bubble to form, our study seeks to provide insights into the machinery underlying speculative bubbles within the context of type spaces.