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RobinZ comments on Money pumping: the axiomatic approach - Less Wrong
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The alteration is to the advantageous trade in the network.
Example: Say you are indifferent to trading your paperclip for my penny, indifferent to trading your pen for my paperclip, and happy to trade your penny for my pen. Under this situation, there is some small increment to the price of the pen which will leave you still happy about the trade - say, two cents. In that case, I can make you pay two cents for my pen, swap it for a paperclip, then swap the paperclip for a penny.
OK this makes a lot more sense now. So you're engaging arbitrage by taking advantage of my transitive preferences?
I could see this scenario being possible, but not if you described all the trades to me beforehand (I assume limiting information is a prerequisite for the pump to work)
Perhaps not this specific set of trades, but money-pumps have been demonstrated experimentally. It's obviously wrong, but there's no theoretical reason why someone might not be susceptible to it.