Free Market

[Utah]

No market is a 100% efficient. However, the higher the degree of efficiency the better the market runs.

"People continue to buy gas at the SA. Why? Didn't see the signs; habit; they like the coffee at SA better; the BP cashier is grumpy; etc. None of those things are rational, but they drive the economy."

None of these actions are irrational:
Didnt see the sign: simple lack of information
Like the coffee better: compensating additional benefit
the BP cashier is grumpy: countering negative consequence for the cheaper gas
Out of habit: compensating additional benefit of familiarity.

[andyfox]

"None of those things are rational"

Of course they are. They are only irrational to economists who see man as a purely economic animal. There's nothing irrational about spending a few cents more per gallon for gas because the coffee is better at the more expensive gas station.

[MMMMMM]

[ QUOTE ]
There's nothing irrational about spending a few cents more per gallon for gas because the coffee is better at the more expensive gas station.

[/ QUOTE ]

Indeed, it might be highly rational if the coffee is truly terrible.

I have tasted coffee so awful that the only proper reaction would have been to spit it out upon the first mouthful. I considered feigning a choking accident and spewing it on the most obnoxious smoker at the table, but managed to exercise restraint. Next thing I knew, the cad had driven off the super-live one, the only player who had made the game worthwhile.

Sometimes it is better to trust your first instincts.

[Cyrus]

We should no longer assume rational behavior when constructing the descriptive models of economic behavior -- and that goes for groups and not just individuals.

The work of various economists and psychologists, in the last decades, has shown that people have a limited understanding of utility, change their utility without realizing it, use criteria which they cannot explain nor account for, etc.

Moreover, the studies conducted with expert statisticians, economists and psychologists nailed conclusively the argument that these phenomena are caused by the lack of education in the competent disciplines or some kind of misunderstanding of the normative rules of rational behavior. "Experts" behave, in general, like other humans. (A surprise for the economists, a wag said.)

--Cyrus

[Utah]

"We should no longer assume rational behavior when constructing the descriptive models of economic behavior"

Huh? That is simply not true. For example, lets take pricing. Today we assume that if the price of a particular good rises then people will buy less and/or find alternatives. Are you saying that is not true?

To what studies are you referringto?

[Cyrus]

[ QUOTE ]
To what studies are you referring to?

[/ QUOTE ]

Inter alia:

"Judgment under Uncertainty : Heuristics and Biases"

"The Winner's Curse"

"The Perception of Risk"

[Utah]

Ah, I see what you are saying. I guess I take exception to the vigor of your argument, not the general point you were making. The markets are not 100% efficient, but it doesnt mean there is no rationality.

Heuristics is a fascinating area in the retail world. I was doing some work with heuristics in brand identity when I worked in strategic planning for Marshall Fields. We were trying to answer, "why do people buy from Marshall Fields?". The answer wasnt product or price. However, that doesnt mean that product or price isnt the most important topic. It simply means it wasnt enough of a differentiator. Rationality still existed - to a point.

Heuristics is why automakers never really point out the features of a car in their ads. instead, they simply try to paint an image of who drives the car.

I remember when I searched for my first house. I had a list of absolute requirements (e.g., 2 bathrooms) and searched for a long time based on the criteria. Then, one day I drove by a house, said, "thats the one" and made an offer on the house without ever walking in it (although contigent on an inspection). I have always been fascinated by that decision.

I plan on ordering the first book you mentioned.

[Boris]

[ QUOTE ]
We should no longer assume rational behavior when constructing the descriptive models of economic behavior -- and that goes for groups and not just individuals.

The work of various economists and psychologists, in the last decades, has shown that people have a limited understanding of utility, change their utility without realizing it, use criteria which they cannot explain nor account for, etc.

[/ QUOTE ]

Sigh. Rational for an economist only means that preferences are transitive. Nothing more. Furthermore, microeconomic theory has been proven to be an extremely powerful predictive as well as analytical tool.

[Cyrus]

[ QUOTE ]
Rational for an economist only means that preferences are transitive. Nothing more.

[/ QUOTE ]

Even when we discount Cancellation, Dominance, and Invariance and stick only to Transitivity, we are still in trouble!

But we see people routinely processing information differently when making choices and when setting 'prices' for these choices, which violates transitivity.

Phenomena of preference reversals are common. When something is observed routinely, its occurence ceases to be a mere glitch and demands the reconsidertion of what we call "rational" and what "irrational". Hausman famously castigated economists for their refusal to "abandon a single systematic and parsimonious theory of choice that is also a theory of rational choice."

[adios]

One assumption is a comptetant, mature, ethical, etc. legal system. Property rights, contracts, and laws that "level the playing field" have to be vigorously enforced. A laissez-faire type may not believe "level the playing field" laws and regulations are all that necessary i.e. much less government intervention is needed.