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The Market: Catalyst for Rationality and Filter of Irrationality

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  • List, John

    ()
    (U of Chicago)

  • Millimet, Daniel

    ()
    (SMU)

Abstract

Assumptions of individual rationality and preference stability provide the foundation for a convenient and tractable modeling approach. While both of these assumptions have come under scrutiny in distinct literatures, the two lines of research remain disjointed. This study begins by explicitly linking the two literatures while providing insights into perhaps the central issue facing behavioral economics today: to what extent does market experience mitigate various forms of individual irrationality? We find considerable evidence that the market is a catalyst for rationality. The study then focuses on aggregate market outcomes by examining empirically whether individual rationality is a prerequisite for market efficiency. Using field data gathered from more than 380 subjects of age 6-18 in multi-lateral bargaining markets at a shopping mall, we find that the market is a filter of irrationality—even when markets are populated solely by irrational buyers, aggregate market outcomes quickly converge to neoclassical predictions.Length: 44 pages

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Bibliographic Info

Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0504.

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Length:
Date of creation: Oct 2005
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Handle: RePEc:smu:ecowpa:0504

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Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
Phone: 214-768-2715
Fax: 214-768-1821
Web page: http://www.smu.edu/economics

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Cited by:
  1. John A. List, 2011. "Does Market Experience Eliminate Market Anomalies? The Case of Exogenous Market Experience," NBER Working Papers 16908, National Bureau of Economic Research, Inc.
  2. Ketcham, Jonathan D. & Lucarelli, Claudio & Miravete, Eugenio J & Roebuck, M Christopher, 2011. "Sinking, Swimming, or Learning to Swim in Medicare Part D," CEPR Discussion Papers 8585, C.E.P.R. Discussion Papers.
  3. Jonathan E. Alevy & Craig E. Landry & John A. List, 2011. "Field Experiments on Anchoring of Economic Valuations," Working Papers 2011-02, University of Alaska Anchorage, Department of Economics.
  4. Costa-Gomes, Miguel A. & Huck, Steffen & Weizsäcker, Georg, 2010. "Beliefs and Actions in the Trust Game: Creating Instrumental Variables to Estimate the Causal Effect," IZA Discussion Papers 4709, Institute for the Study of Labor (IZA).
  5. V. Smith & Eric Moore, 2010. "Behavioral Economics and Benefit Cost Analysis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 46(2), pages 217-234, June.
  6. Proeger, Till & Meub, Lukas, 2014. "Overconfidence as a social bias: Experimental evidence," Economics Letters, Elsevier, vol. 122(2), pages 203-207.
  7. Meub, Lukas & Proeger, Till & Bizer, Kilian, 2013. "Anchoring: A valid explanation for biased forecasts when rational predictions are easily accessible and well incentivized?," Center for European, Governance and Economic Development Research Discussion Papers 166, University of Goettingen, Department of Economics.
  8. Maria Porter, 2014. "For Love or Reward? Characterising Preferences for Giving to Parents in an Experimental Setting," Economics Series Working Papers 709, University of Oxford, Department of Economics.
  9. Meub, Lukas & Proeger, Till, 2014. "Are groups 'less behavioral'? The case of anchoring," Center for European, Governance and Economic Development Research Discussion Papers 188, University of Goettingen, Department of Economics.
  10. List, John & Millimet, Daniel, . "Bounding the Impact of Market Experience on Rationality: Evidence from a Field Experiment with Imperfect Compliance," Departmental Working Papers 0505, Southern Methodist University, Department of Economics.

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