Re: Why do trades occur?
 

preference for liquidity changed, or risk adjustments, it maybe perfectly rational to trade even with complete information.

Re: Why do trades occur?
 

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clearly this doesn't happen in the real world though. What's wrong with this argument?

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Your assumptions are way off, and your mechanism for trades is incorrect. Also, there are many factors that weren't addressed (motivations, information, other liabilities, taxes, morals, limited bankrolls,... there's a million things that affect what people buy/sell and when, and for what price).

Do you really not see what's wrong with your argument, or are you trying to get at something else here?

The mechanism for trades is more like a merchant putting a price tag in the window offering to buy/sell. If he's getting a ton of takers he might then realize that his price is incorrect and he should change it. Nobody stops in to say- hey I think this TV is worth $1300, not $1000. They just buy the TV and are happy they saved themselves $300. Now if there were two merchants selling TVs in a perfect market I think we could assume that the price would settle at its true value. I think this is essentially what is going on in the stock market, but so many things change what the market believes that true price should be that it's in constant flux. Sometimes there are people that correctly assume the TV is undervalued and buy it, but sometimes people think it's undervalued and buy it only to find out it was actually over valued.

EDIT- That was a bigger edit than I planned.

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The point in "infinite bankrolls" is obviously an exaggeration... but the point of it is so that people are not willing to pass up a +EV situation because they need cash for real world purposes, and so that they can take high-risk but profitable positions. This isn't an unreasonable assumption because consider, say, large hedge funds.

For your TV example to be relevant, the merchant must be selling it in large volumes. If some guy/many people come in happily buying the TV's with no problems, don't you think the merchant will raise his prices? And maybe there's something the buyers dont know that the merchant does... maybe the TV's are manufactured poorly and you don't know this. But the fact that he's selling it for $1000 while you value it at 1300 should at least make you reconsider your valuation.

two people have mentioned risk transfer and i can't say I know what that is, but i'll look into it. Thanks.

Re: Why do trades occur?
 

If this doesn't help you understand nothing will. Stock trading is like poker in the respect that you can never have complete information. In fact even if you had complete information some of it would be imperfect or subject to change due to outside influences. Also the market doesn't trade 24/7, things change overnight, you may be aware of a negative change and be willing to sell because you woke up at 6 AM, the buyer may have just woke up at 7:30 AM and had planned on buying the stock at a certain opening price or lower.

Jimbo