Theory and Decision 64 (2-3):193-228 (2008)

Under certain conditions private information can be a source of trade. Arbitrage for instance can occur as a result of the existence of private information. In this paper we want to explicitly model information. To do so we define an ‘information function’. This information function is a mathematical object, also known as a so called ‘wave function’. We use the definition of wave function as it is used in quantum mechanics and we attempt to show the usefulness of this wave function in an economic context. We attempt to answer the following questions. How does the information function relate to private information? How can we use the information function to define the ‘quantity’ of information? How can we use the information function in arbitrage-based option pricing? How can the information function be used in the formulation of a so called Universal Brownian motion?
Keywords arbitrage  information function  non-arbitrage theorem  option pricing  quantity of information  quantum mechanics  Universal Brownian motion  wave function
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DOI 10.1007/s11238-007-9054-2
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The Large, the Small and the Human Mind.Roger Penrose - 1997 - Cambridge University Press.

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