commom knowledge

commom knowledge - American Economic Association Common...

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American Economic Association Common Knowledge Author(s): John Geanakoplos Reviewed work(s): Source: TheJournalofEconomicPerspectives, Vol. 6, No. 4 (Autumn, 1992), pp. 53-82 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2138269 . Accessed: 15/02/2012 12:52 . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected] American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The Journal of Economic Perspectives. http://www.jstor.org
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Journal of Economic Perspectives- Volume 6, Number 4-Fall 1992-Pages 53-82 Common Knowledge John Geanakoplos P_ eople, no matter how rational they are, usually act on the basis of incomplete information. If they are rational they recognize their own ignorance and reflect carefully on what they know and what they do not know, before choosing how to act. Furthermore, when rational agents interact, they think about what the others know and do not know, and what the others know about what they know, before choosing how to act. Failing to do so can be disastrous. When the notorious evil genius Professor Moriarty confronts Sherlock Holmes for the first time he shows his ability to think interactively by remarking, "All I have to say has already crossed your mind." Holmes, even more adept at that kind of thinking, responds, "Then possibly my answer has crossed yours." Later, Moriarty's limited mastery of interactive epistemology allowed Holmes and Watson to escape from the train at Canterbury, a mistake which ultimately led to Moriarty's death, because he went on to Paris after calculating that Holmes would normally go on to Paris, failing to deduce that Holmes had deduced that he would deduce what Holmes would normally do and in this circumstance get off earlier. Knowledge and interactive knowledge are central elements in economic theory. Any prospective stock buyer who has information suggesting the price will go up must consider that the seller might have information indicating that the price will go down. If the buyer further considers that the seller is willing to sell the stock, having also taken into account that the buyer is willing to purchase the stock, the prospective buyer must ask whether buying is still a good idea. Can rational agents agree to disagree? Is this question connected
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This note was uploaded on 03/27/2012 for the course ECON 2280 taught by Professor Daniel during the Spring '12 term at Dalhousie.

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commom knowledge - American Economic Association Common...

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