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Individual Irrationality and Aggregate Outcomes

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  • Ernst Fehr
  • Jean-Robert Tyran

Abstract

There is abundant evidence that many individuals violate the rationality assumptions routinely made in economics. However, powerful evidence also indicates that violations of individual rationality do not necessarily refute the aggregate predictions of standard economic models that assume full rationality of all agents. Thus, a key question is how the interactions between rational and irrational people shape the aggregate outcome in markets and other institutions. We discuss evidence indicating that strategic complementarity and strategic substitutability are decisive determinants of aggregate outcomes. Under strategic complementarity, a small amount of individual irrationality may lead to large deviations from the aggregate predictions of rational models, whereas a minority of rational agents may suffice to generate aggregate outcomes consistent with the predictions of rational models under strategic substitutability.

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  • Ernst Fehr & Jean-Robert Tyran, "undated". "Individual Irrationality and Aggregate Outcomes," IEW - Working Papers 252, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:252
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    More about this item

    Keywords

    Irrationality; Rationality; Anomaly; Aggregate Outcome; Competitive Markets; Money Illusion; Base Rate Fallacy;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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