People act completely rational in accordance with their beliefs.
True story.
Topic: The Myth Of Irrationality In Economics (Read 1337 times)
True story.
I am still impressed that people jump from human behavior, a domain that belongs to psychology and economics, to fields that are way way way off tangent such as quantum physics.
Look, quantum physics has a freaking loooooooooong way to even be compatible with general relativity, and we are talking about an endless debate within one single discipline: physics.
From there to extrapolate all the way to psychology, lets say that it is quite a stretch of relativistic scales.
Please lets stay within the relevant field of study please.
The relevant one is neither psychology nor economics, but multidisciplinary field that is a combination of both: behavioral economics.
That's where the irrational economics are specifically studied. If you guys are interested find about Dan Ariely.
Here is a clip in Ted Talks that might interest you guys: http://www.ted.com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions.html
And one more thing, I would appreciate if you guys stop using the word "theory" so lightly.
If you are thinking "what if", that is imagining/conjecturing, not theorizing.
If you are thinking "I think that..." that is just giving an opinion, not theorizing.
If you are thinking "I think that..." AND have a way to test it out, then you have an hypothesis. Still not a theory.
The truth is, in your normal common life, you will never be making theories.
Most of the times if you think "In theory" you are most of the cases extrapolating or conjecturing from common sense or common knowledge.
Please don't do that.
Theories in science are the closest things to truths.
Saying "Theory" in science it is the same equivalent as saying rigorous Scientific Knowledge that has been tested and retested to be robust enough to be considered confirmed (as long as every new experimentation is in line with the predictions of the theory, not only keeps it alive but strengthens it).
Anyways, sorry for this, but I just had to say it.
It is my pet peeve to see people using the word theory so freely.
Look, quantum physics has a freaking loooooooooong way to even be compatible with general relativity, and we are talking about an endless debate within one single discipline: physics.
From there to extrapolate all the way to psychology, lets say that it is quite a stretch of relativistic scales.
Please lets stay within the relevant field of study please.
The relevant one is neither psychology nor economics, but multidisciplinary field that is a combination of both: behavioral economics.
That's where the irrational economics are specifically studied. If you guys are interested find about Dan Ariely.
Here is a clip in Ted Talks that might interest you guys: http://www.ted.com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions.html
And one more thing, I would appreciate if you guys stop using the word "theory" so lightly.
If you are thinking "what if", that is imagining/conjecturing, not theorizing.
If you are thinking "I think that..." that is just giving an opinion, not theorizing.
If you are thinking "I think that..." AND have a way to test it out, then you have an hypothesis. Still not a theory.
The truth is, in your normal common life, you will never be making theories.
Most of the times if you think "In theory" you are most of the cases extrapolating or conjecturing from common sense or common knowledge.
Please don't do that.
Theories in science are the closest things to truths.
Saying "Theory" in science it is the same equivalent as saying rigorous Scientific Knowledge that has been tested and retested to be robust enough to be considered confirmed (as long as every new experimentation is in line with the predictions of the theory, not only keeps it alive but strengthens it).
Anyways, sorry for this, but I just had to say it.
It is my pet peeve to see people using the word theory so freely.
Irrational behavior obviously exists, and if those decisions are economical, well you get irrational economics.
Welcome to the world of Behavioral Economics, a whole interdisciplinary field dedicated to the research of irrational economic decisions.
The very definition of classical economics is that all decisions are rational. This is more a dogma than a law.
The main argument is that all markets act efficiently as an aggregate, individuals doing dumb stuff doesn't affect to the market as a whole. But that is further from the truth, the market failed several times in history, and had enough bubbles to call them rational at all.
Welcome to the world of Behavioral Economics, a whole interdisciplinary field dedicated to the research of irrational economic decisions.
The very definition of classical economics is that all decisions are rational. This is more a dogma than a law.
The main argument is that all markets act efficiently as an aggregate, individuals doing dumb stuff doesn't affect to the market as a whole. But that is further from the truth, the market failed several times in history, and had enough bubbles to call them rational at all.
I agree with this quote
Economics has too many variables rationality is more less an average
Patterns can be seen but are not exclusive
Human action is not robotic hence markets are volatile and requires the evaluation of human nature to determine rationality
very interesting thread, thanks.
Uncertainty at the quantum level is just because there is not enough knowledge yet to explain everything.
It's not quite clear yet if this is true or not.http://en.wikipedia.org/wiki/Hidden_variable_theory#Recent_developments
In theory, if you knew the exact position and velocity and direction of every micro-particle in the universe you would be able to predict everything that would ever occur from there on out. But that would take a lot of ASICs to do the calculations.
https://en.wikipedia.org/wiki/Uncertainty_principle
Uncertainty at the quantum level is just because there is not enough knowledge yet to explain everything.
In theory, if you knew the exact position and velocity and direction of every micro-particle in the universe you would be able to predict everything that would ever occur from there on out. But that would take a lot of ASICs to do the calculations.
https://en.wikipedia.org/wiki/Uncertainty_principle
Uncertainty at the quantum level is just because there is not enough knowledge yet to explain everything. Not that I am saying there will eventually be that knowledge, but there is likely an explanation behind it beyond our current understanding.
Just like how the rain gods produced rain. It was uncertain exactly which ritual most pleased them.
Actually, this is nothing like that. It's not instantly intuitive, most pop physics explanations are so bad they're misleading, and trying to understand the underlying math doesn't seem like too much fun (just looked at the wikip page). Even Schrodinger's Cat, something that's meant to be easy to grasp, is misunderstood & misrepresented by many *writers*. But it's fun, the only short hint i can give is "if after you get it, it seems 'blah,' the explanation is wrong, or you didn't get it." Something like that.
In theory, if you knew the exact position and velocity and direction of every micro-particle in the universe you would be able to predict everything that would ever occur from there on out. But that would take a lot of ASICs to do the calculations.
https://en.wikipedia.org/wiki/Uncertainty_principle
Uncertainty at the quantum level is just because there is not enough knowledge yet to explain everything. Not that I am saying there will eventually be that knowledge, but there is likely an explanation behind it beyond our current understanding.
Just like how the rain gods produced rain. It was uncertain exactly which ritual most pleased them.
This post is very misguided and misinformed by the original poster.
Irrational behavior obviously exists, and if those decisions are economical, well you get irrational economics.
Welcome to the world of Behavioral Economics, a whole interdisciplinary field dedicated to the research of irrational economic decisions.
The very definition of classical economics is that all decisions are rational. This is more a dogma than a law.
The main argument is that all markets act efficiently as an aggregate, individuals doing dumb stuff doesn't affect to the market as a whole. But that is further from the truth, the market failed several times in history, and had enough bubbles to call them rational at all.
Irrational behavior obviously exists, and if those decisions are economical, well you get irrational economics.
Welcome to the world of Behavioral Economics, a whole interdisciplinary field dedicated to the research of irrational economic decisions.
The very definition of classical economics is that all decisions are rational. This is more a dogma than a law.
The main argument is that all markets act efficiently as an aggregate, individuals doing dumb stuff doesn't affect to the market as a whole. But that is further from the truth, the market failed several times in history, and had enough bubbles to call them rational at all.
In theory, if you knew the exact position and velocity and direction of every micro-particle in the universe you would be able to predict everything that would ever occur from there on out. But that would take a lot of ASICs to do the calculations.
https://en.wikipedia.org/wiki/Uncertainty_principle
The way you present it, there can be no irrationality because there is a reason for everything anyone does. The neurons have a path that they traverse and there is a reason that such a path exists. If you get down to the most microscopic level everything can be explained.
This would counter the Jurassic Park explaination of Chaos Theory where the guy takes a drop of water and drips it onto the girl's hand stating that the path the water takes cannot be predicted becauase Chaos Theory dictates that in complex systems, the outcome will be different every time. But by your definition, knowledge of every particle, every skin cell, the size of the water droplet, the slightest shift in air particles during the drop means that there is a rational explaination for the water going one way or another.
While this is true, most people look at things from a more broad level and not at a microscopic level.
In theory, if you knew the exact position and velocity and direction of every micro-particle in the universe you would be able to predict everything that would ever occur from there on out. But that would take a lot of ASICs to do the calculations.
This would counter the Jurassic Park explaination of Chaos Theory where the guy takes a drop of water and drips it onto the girl's hand stating that the path the water takes cannot be predicted becauase Chaos Theory dictates that in complex systems, the outcome will be different every time. But by your definition, knowledge of every particle, every skin cell, the size of the water droplet, the slightest shift in air particles during the drop means that there is a rational explaination for the water going one way or another.
While this is true, most people look at things from a more broad level and not at a microscopic level.
In theory, if you knew the exact position and velocity and direction of every micro-particle in the universe you would be able to predict everything that would ever occur from there on out. But that would take a lot of ASICs to do the calculations.
TL;DR:
1) Irrationality, as you define it, has nothing to do with nonsensical motivations & needs, but misapplying logic (the meaning of which you hold to be self-evident) when acting on those motivations to meet those needs.
2)
3) The market does not have an irrational component.
1) Irrationality, as you define it, has nothing to do with nonsensical motivations & needs, but misapplying logic (the meaning of which you hold to be self-evident) when acting on those motivations to meet those needs.
2)
3) The market does not have an irrational component.
What have i missed?
Wow - you got it!!!
I worry too much about subtexts
TL;DR:
1) Irrationality, as you define it, has nothing to do with nonsensical motivations & needs, but misapplying logic (the meaning of which you hold to be self-evident) when acting on those motivations to meet those needs.
2)
3) The market does not have an irrational component.
1) Irrationality, as you define it, has nothing to do with nonsensical motivations & needs, but misapplying logic (the meaning of which you hold to be self-evident) when acting on those motivations to meet those needs.
2)
3) The market does not have an irrational component.
What have i missed?
Wow - you got it!!!
No need to be sorry. Everything evens out over time. I was in Amsterdam a couple of weeks ago and they have made a full recovery from the Tulip mania.
Let's hope Supernode mania takes the same road. TL;DR:
1) Irrationality, as you define it, has nothing to do with nonsensical motivations & needs, but misapplying logic (the meaning of which you hold to be self-evident) when acting on those motivations to meet those needs.
2)
3) The market does not have an irrational component.
1) Irrationality, as you define it, has nothing to do with nonsensical motivations & needs, but misapplying logic (the meaning of which you hold to be self-evident) when acting on those motivations to meet those needs.
2)
3) The market does not have an irrational component.
What have i missed?
Most of the "Irrationality" that bothers economists is the behaviour of crowds. Market bubbles for example.
Sure, but this evens out over time. The question is just the time frame. Bitcoin, because unregulated, may move a lot faster than other assets.
Also, what happens during bubbles and bursts? Weak hands -> strong hands. Evolution and all.
No need to be sorry. Everything evens out over time. I was in Amsterdam a couple of weeks ago and they have made a full recovery from the Tulip mania.
Most of the "Irrationality" that bothers economists is the behaviour of crowds. Market bubbles for example.
Sure, but this evens out over time. The question is just the time frame. Bitcoin, because unregulated, may move a lot faster than other assets.
Also, what happens during bubbles and bursts? Weak hands -> strong hands. Evolution and all.
We're not perfect rational efficient machines, and that is what makes us human.
I mean, what would a world of robots look like? Maybe some techno-transhumanists would disagree with me, but I would not want to live in such a world, as I feel something would be missing. Would robots paint pictures or play music?
Now with that said, I also find the irrationality in economics argument silly, because maybe some individual humans may act "irrational" at times, but the point is to identify and predict general tendencies and trends, such as that people will be more likely to buy the same product from the dealer that offers them the best price.
I mean, what would a world of robots look like? Maybe some techno-transhumanists would disagree with me, but I would not want to live in such a world, as I feel something would be missing. Would robots paint pictures or play music?
Now with that said, I also find the irrationality in economics argument silly, because maybe some individual humans may act "irrational" at times, but the point is to identify and predict general tendencies and trends, such as that people will be more likely to buy the same product from the dealer that offers them the best price.
Most of the "Irrationality" that bothers economists is the behaviour of crowds. Market bubbles for example.
We're not perfect rational efficient machines, and that is what makes us human.
I mean, what would a world of robots look like? Maybe some techno-transhumanists would disagree with me, but I would not want to live in such a world, as I feel something would be missing. Would robots paint pictures or play music?
Now with that said, I also find the irrationality in economics argument silly, because maybe some individual humans may act "irrational" at times, but the point is to identify and predict general tendencies and trends, such as that people will be more likely to buy the same product from the dealer that offers them the best price.
I mean, what would a world of robots look like? Maybe some techno-transhumanists would disagree with me, but I would not want to live in such a world, as I feel something would be missing. Would robots paint pictures or play music?
Now with that said, I also find the irrationality in economics argument silly, because maybe some individual humans may act "irrational" at times, but the point is to identify and predict general tendencies and trends, such as that people will be more likely to buy the same product from the dealer that offers them the best price.
I hear very often from intelligent people that economics cannot be applied to certain problems because people behave irrationally and economic theory is based upon the expectation of a rational behavior. This is an incredibly powerful misconception that keeps persisting over generations and acts as a kind of an excuse for all sorts of attacks against the free market ideas. I'd like to explain why it's false to the core.
It is not only rational behavior (whatever that may mean) which underlies a 1st order theory of economics. We must also assume that each individual has a negligibly small market share (compared to total volumes on the market).
Consider for example the behavior of a gas. Sure, a single atom might at any time have very irrational behavior (the word used by physicists is "peculiar"). However the classical, 1st order moment equations can still apply due an important fact: there are gobs and gobs of atoms, and they are all so damn small their individual motions don't matter at all, only statistical averages matter.
I argue that it is not the inherent irrationality of participants that makes economics hard. The extremely dynamic scale of the relative size of individuals in affecting markets makes economics a difficult study of non-equilibrium dynamics.
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