Rational Bar Bets

Various \no trade" theorems suggest that rational agents who start from a common prior should not make speculative bets with each other. To support speculation, market microstructure models typically invoke agents with dynamic hedging demands. Thus a \bar bet", a simple bet on a risk-irrelevant topic negotiated in an informal but non-private social context, seems irrational. We might, however, rationalize such bets in two di erent ways. First, we might assume they have the same purpose as a lot of similar behavior in similar social contexts: impressing an audience. By o ering to bet on a topic, you might credibly signal to an audience containing potential associates (employers, lovers, friends, etc.) that you are informed about that topic. And these potential associates may prefer to associate with informed people. Alternatively, we might assume that the purpose of such bets is to persuade. The audience may contain decision-makers who will make a decision in your favor only if they believe that some probability is above a certain threshold. In this case you might o er to bet in order to persuade decision-makers that you really have seen a signal favorable to your case. Either way, we might explain \bar bets" as costly signals in a signaling game.