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Does the market self-correct? Asymmetrical adjustment and the structure of economic error

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  • Peter Leeson
  • Christopher Coyne
  • Peter Boettke

Abstract

While both errors of overoptimism and errors of overpessimism are possible in the face of imperfect information, the presence of option value from deferring a decision to exchange causes trader errors to be overpessimistically biased. This is problematic because, unlike errors of overoptimism, errors of overpessimism are not 'automatically' revealed to the agents who make them. Furthermore, owing to the 'bad news principle of irreversible investment,' these errors are likely to persist. We show how entrepreneurial activity corrects such errors and prevents their persistence, creating a tendency towards market efficiency despite the presence of imperfect information.

Suggested Citation

  • Peter Leeson & Christopher Coyne & Peter Boettke, 2006. "Does the market self-correct? Asymmetrical adjustment and the structure of economic error," Review of Political Economy, Taylor & Francis Journals, vol. 18(1), pages 79-90.
  • Handle: RePEc:taf:revpoe:v:18:y:2006:i:1:p:79-90
    DOI: 10.1080/09538250500354181
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    Cited by:

    1. Christopher Coyne & Justin Isaacs & Jeremy Schwartz, 2010. "Entrepreneurship and the taste for discrimination," Journal of Evolutionary Economics, Springer, vol. 20(4), pages 609-627, August.
    2. David Skarbek, 2009. "Alertness, local knowledge, and Johnny Appleseed," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 22(4), pages 415-424, December.
    3. Christopher Coyne & Justin Isaacs & Jeremy Schwartz & Anthony Carilli, 2007. "Put me in, Coach, I’m ready to play," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 20(4), pages 237-246, December.

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