When is cheap talk valuable?: The Case of the INSEAD Ball Ticket Market

P. Raghavendra Rau

This paper examines a case at a business school in Europe where one trader in a sophisticated e-mail market announced that he was trading on ethical considerations rather than on profit maximization considerations. This seemingly irrelevant "cheap talk" announcement caused the price of the traded asset to decline by 30% in one day. The paper hypothesizes that this is because the announcement made it no longer common knowledge that all market participants were using the same price-setting rule, which caused a consequent collapse in market prices. The paper develops a simple model and derives conditions under which cheap talk can burst an asset-price bubble.

Journal of Economic Literature Classification Codes: C79, D84

This paper has been presented at the

• Financial Management Association meetings, Seattle, 2000
• Alternative Perspectives in Finance conference, Dundee, 2000;
• European Financial Management Association meetings, Athens, 2000
• International Conference on Game Theory, Jerusalem, June 1995;
• INSEAD Business Economics Seminar, May 1995.

• The Financial Times , 7 February, 2000, page 19
• De Standaard (Belgium), February 8, 2000

Interestingly, the Financial Times article also had a sequel. The "ethical trader" who crashed the market wrote to the Financial Times justifying his actions. You can read the letter here.

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