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The market: Catalyst for rationality and filter of irrationality

  • Daniel Millimet
  • John List

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.

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Paper provided by The Field Experiments Website in its series Framed Field Experiments with number 00179.

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Date of creation: 2008
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Handle: RePEc:feb:framed:00179
Contact details of provider: Web page: http://www.fieldexperiments.com

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  1. Richard Blundell & Monica Costa Dias, 2008. "Alternative approaches to evaluation in empirical microeconomics," CeMMAP working papers CWP26/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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  3. Jeffrey Smith & Petra Todd, 2003. "Does Matching Overcome Lalonde's Critique of Nonexperimental Estimators?," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20035, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
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  7. Phlips, Louis, 1972. "A Dynamic Version of the Linear Expenditure Model," The Review of Economics and Statistics, MIT Press, vol. 54(4), pages 450-58, November.
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  17. William T. Harbaugh & Kate Krause & Timothy R. Berry, 2001. "GARP for Kids: On the Development of Rational Choice Behavior," American Economic Review, American Economic Association, vol. 91(5), pages 1539-1545, December.
  18. James Andreoni & John Miller, 2002. "Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism," Econometrica, Econometric Society, vol. 70(2), pages 737-753, March.
  19. Vernon L. Smith, 1965. "Experimental Auction Markets and the Walrasian Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 73, pages 387.
  20. Heckman, James J & Ichimura, Hidehiko & Todd, Petra E, 1997. "Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Wiley Blackwell, vol. 64(4), pages 605-54, October.
  21. Rajeev H. Dehejia & Sadek Wahba, 1998. "Causal Effects in Non-Experimental Studies: Re-Evaluating the Evaluation of Training Programs," NBER Working Papers 6586, National Bureau of Economic Research, Inc.
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