Free Market

[InchoateHand]

I think the OP was picking a particularly blatant example to illustrate that financial interests are not the only interests at work. The applicability or prevalence of that example was not really an issue.

[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.

[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.

[Utah]

"I don't understand what you mean here. If this is a commentdon my "exponential growth again" remark I find it strange. If you call that to be " incorrect about some underlying principles" I would say you are wrong, that is not an underlying principle at all, and everyone should be able to understand it cannot go on, yet a lot of people lose money every time."

Lets say I buy a stock that appears to be in a bubble situation. I believe that the stock will keep rising because the frenzy shows no signs of letting up. I am making some assumptions when I place my buy (e.g., the frenzy will continue, the economic situation hasnt changed, etc.). My assumptions may be wrong but it doesnt mean that I was irrational.

Maybe I can explain with another example. When I buy stock I assume the books arent cooked. Now, if it comes out that the books are cooked and the stock drops dramatically, it doesnt mean that I was irrational. It only means that my information is incorrect.

[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

[Cyrus]

[ QUOTE ]
Lets say I buy a stock that appears to be in a bubble situation. I believe that the stock will keep rising because the frenzy shows no signs of letting up. I am making some assumptions when I place my buy (e.g., the frenzy will continue, the economic situation hasnt changed, etc.). My assumptions may be wrong but it doesnt mean that I was irrational.

Another example. When I buy stock I assume the books aren't cooked. Now, if it comes out that the books are cooked and the stock drops dramatically, it doesnt mean that I was irrational. It only means that my information is incorrect.

[/ QUOTE ]

In your 2nd example, you were dealing with partially hidden information and the part that was hidden (from you) caused you to make a decision which was, in retrospect, wrong. Nothing irrational, seemingly.

But in your 1st example, all the information is out there!

And it looks like you are simply evaluating it erroneously. You are buying into a stock that's "in a bubble situation", as you wrote. You are betting that "the stock will keep rising because the frenzy shows no signs of letting up". In other words, it is your decision, based on the available information, that turns out to be incorrect and not the information itself.

Some would even say, it is an irrational decision, by some definitions of the term (i.e. believing that stockmarket bubbles are more likely to grow further rather than burst, ignoring historical precedent, etc).

--Cyrus

PS : I am assuming that your "utility" is to maximize return in both examples.

[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?

[nicky g]

To what extent do people buying bubble assets realise they're in a bubble? I'm not sure it's very much. For example in the dotcom model you got all sorts of people arguing sincerely that the economic model had changed forever, that firms that wouldn't amke a profit for years or decades could be worth billions, that the Dow was going to rise indefinitely becuse of the efficiencies made available by technology etc etc. You also of course got unscrupulous people pushing those shares. Part of the problem is that in the short term, people think they're acting self-inetestedly but they're either deluded or deceived. (Of course that happens every day to individuals, but I mean broadly as a whole). Then the long term gives them a kick on the jimmies, but eventually they forget about it.

[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.