All the trades must be indifferent or advantageous to you, so that you will accept them. And if even one of those trades is advantageous, then this is a money pump: I can charge you a tiny amount for that trade, making free money out of you. You are now strictly poorer than if you had not accepted the tradesat all.
I think this is part I don’t get.
Lets say we’re making a trade I would be indifferent about under normal circumstances (say a red paper clip for a pen). If you then try to turn around and try to “pump” me for a transaction cost of $1, I would no longer be indifferent about the trade. I would be negative about it.
I know you said that the situation requires me to forget about expected utility axioms, but does this also mean I shouldn’t have rational expectations about the value of the trade? At what point do these assumptions stop representing the real world?
The alteration is to the advantageous trade in the network.
Example: Say you are indifferent to trading your paperclip for my penny, indifferent to trading your pen for my paperclip, and happy to trade your penny for my pen. Under this situation, there is some small increment to the price of the pen which will leave you still happy about the trade—say, two cents. In that case, I can make you pay two cents for my pen, swap it for a paperclip, then swap the paperclip for a penny.
OK this makes a lot more sense now. So you’re engaging arbitrage by taking advantage of my transitive preferences?
I could see this scenario being possible, but not if you described all the trades to me beforehand (I assume limiting information is a prerequisite for the pump to work)
I think this is part I don’t get.
Lets say we’re making a trade I would be indifferent about under normal circumstances (say a red paper clip for a pen). If you then try to turn around and try to “pump” me for a transaction cost of $1, I would no longer be indifferent about the trade. I would be negative about it.
I know you said that the situation requires me to forget about expected utility axioms, but does this also mean I shouldn’t have rational expectations about the value of the trade? At what point do these assumptions stop representing the real world?
The alteration is to the advantageous trade in the network.
Example: Say you are indifferent to trading your paperclip for my penny, indifferent to trading your pen for my paperclip, and happy to trade your penny for my pen. Under this situation, there is some small increment to the price of the pen which will leave you still happy about the trade—say, two cents. In that case, I can make you pay two cents for my pen, swap it for a paperclip, then swap the paperclip for a penny.
OK this makes a lot more sense now. So you’re engaging arbitrage by taking advantage of my transitive preferences?
I could see this scenario being possible, but not if you described all the trades to me beforehand (I assume limiting information is a prerequisite for the pump to work)
Perhaps not this specific set of trades, but money-pumps have been demonstrated experimentally. It’s obviously wrong, but there’s no theoretical reason why someone might not be susceptible to it.