Learning from Speculating and the No-Trade Theorem

Due to the no trade theorems of Aumann (1976) and others, models of speculative trade have relied on the presence of irrational noise traders. We present a model in which trade occurs when all agents are fully rational speculators that share a common prior and trade a common value asset based only on private information. The motive that helps agents overcome adverse selection, and hence the no trade result, is experimentation. An agent that engages in trade receives a payoff but also learns about his type. If he learns he has a low skill the agent exitswhile if he learns he has a high skill he remains and continues to benefit from trade against future cohorts. Younger cohorts appear as noise traders in a single period snapshot since they enter unprofitable trades, thus themodel provides a rational foundation for some perceived behavioural biases including overconfidence.