5 ms·

> The stock market is constantly evolving around a large number of indenpdent agents most of which behave irrationally. I think they actually behave rationally

> The stock market is constantly evolving around a large number of indenpdent agents most of which behave irrationally. I think they actually behave rationally, but all according to different fact-bases. People usually don't say "this is really dumb but I'll do it anyhow" most of the time, most of the time they really believe that they're doing something pretty rational. But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate. Or in the case of China, they want to defend their currency peg. You might disagree with their decision to peg, but if you accept for a moment that this is their goal, then it's super rational.

bsbechtel 11y ago
>But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate. Yes, and sometimes they have different short term and long term goals, sometimes not all financial, that change their rational behavior.
Beltiras 11y ago
"I understand why I shouldn't but I still will." I think that statement is irrational. It still describes a plethora of behaviors.
deathhand 11y ago
Asynchronous information/ability to do is the basis of capitalism.
jerednel 11y ago
I don't know about that. Lots of people make emotional decisions when it comes to money and will sell at the first sign of trouble. I think personal finance is one area where many are not rational.
justincormack 11y ago
That is not the technical definition of "rational" from economics though, which is what the models of markets are based on.
vonmoltke 11y ago
> I think they actually behave rationally, but all according to different fact-bases. People usually don't say "this is really dumb but I'll do it anyhow" most of the time, most of the time they really believe that they're doing something pretty rational. > But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate. Believing an action is a good idea or in your best interests when it actually isn't, or basing decisions on a warped perception of reality, is pretty much a textbook case of acting irrationally. Rational versus irrational is not about perception, it is about how well perception matches reality.
- msandford 11y ago
  So I hear what you're saying, but if that's the case then everyone, everywhere acts irrationally all the time. Because nobody is an oracle who knows how everything will play out. Is that the point that you're trying to make? Nobody has perfect information. I guess what I was trying to describe is that people might act foolishly, but they don't know it's foolish. And most of the time we only know it's foolish in hindsight. At the time it might have been brilliant, but they went broke so it wasn't. If they'd made billions, it would have been genius. So basically most people have "facts" that they believe to be true, and use them to make decisions that in light of those "facts" are smart. Few people disregard all facts and reasons and just do whatever, or do something counter to what their facts tell them. What I'm describing might not be the economics definition of rationality, but it's closely tied to the colloquial definition and the idea that pops into my head when someone says "rational".
  - ska 11y ago
    I think it's slightly more subtle than that. Often people have the information they need to make a rational decision, but they choose to discount, ignore, or misinterpret it. No decision based on this choice can meaningfully be called "rational" without stretching the definition of rationality to the useless. This is quite different that making a rational decision based on incomplete or imperfect information. Modeling human beings as rational actors, even in aggregate, is often a deeply flawed approximation for this reason.
  - 11y ago
BurningFrog 11y ago
I think that was a clumsy way of saying "unpredictably".
dragonwriter 11y ago
> I think they actually behave rationally, but all according to different fact-bases. Rationality, in the economic sense, involves (among other things) actors acting with accurate and complete information about all consequences of their market choices. Actors acting with "different fact-bases" are necessarily acting with inaccurate and/or incomplete information (because if it was both complete and accurate, it wouldn't differ between actors), and therefore, economically speaking, irrationally.
- forgetsusername 11y ago
  >Rationality, in the economic sense, involves (among other things) actors acting with accurate and complete information about all consequences of their market choices. No, it assumes that agents use all available information optimally. Complete information is not a requirement.
  - dragonwriter 11y ago
    > No, it assumes that agents use all available information optimally. No, it is defined to include perfect information; actors using all available information optimally within the limits of their cognitive ability and considering, also, the opportunity cost of devoting resources to informationa evaluation and decision-making is a weaker alternative ("bounded rationality") to pure rationality.
    - forgetsusername 11y ago
      >No, it is defined to include perfect information "Complete" and "perfect" information are not the same thing. In games like poker, players have perfect information, but not complete information.
      - dragonwriter 11y ago
        > Complete" and "perfect" information are not the same thing. Perfect information, in the rational choice theory sense, is both complete in the sense that it covers all economic consequences that impact the experienced utilities of the decision maker positively or negatively out to an infinite time horizon, and free of errors over that entire scope, which is why I used "accurate and complete" as a less-formal equivalent of "perfect" upthread. > In games like poker, players have perfect information, but not complete information. In poker, players do not have perfect information in the rational choice theory sense (or the game theory sense, which is generally stated differently, but I think is actually equivalent.) Poker is, in fact, one of the canonical examples of a game featuring imperfect information.
grogenaut 11y ago
I'm gonna start a new yolo fund to capture this market!
mapt 11y ago
They behave rationally... the issue, more than informational assymmetry that you note, is that they're facing Newcomb-like problems: They're betting on what other people are going to bet on what they're going to bet on what other people are going to bet... And they're all trying to do it faster than the average participant, in order to attain advantage. Stocks aren't traded on some fundamental objective functions of accounting value and projected profits, they're traded purely on what people believe that other other people will be paying for the stock five milliseconds / five minutes / five days / five years from now. All at once, in a recursive mess. The professed theory is that some kind of objective truth underlies all this, and eventually generates some theory of value that all the speculators can latch on to - but that sort of investing is a tiny fraction of trading volume.
- dekhn 11y ago
  Whether agents act rationally is an open question in the economic literature. I claim most investors are irrational, but that the market appears to have an emergent behavior that makes it appear rational. Truly explaining this sort of emergent behavior in a feedback and partial information and game-player system with a trivial narrative about whether agents are rational seems to deny the inherent complexity of the system.
mbostleman 11y ago
I wonder if the impression that others are acting irrationally is really a symptom of the local knowledge problem on the observer's part. Or even the part of the actor. To the extent this is true, is acting on incomplete information "irrational" or is it "rational" but flawed.

bsbechtel 11y ago

>But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate. Yes, and sometimes they have different short term and long term goals, sometimes not all financial, that change their rational behavior.

Beltiras 11y ago

"I understand why I shouldn't but I still will." I think that statement is irrational. It still describes a plethora of behaviors.

deathhand 11y ago

Asynchronous information/ability to do is the basis of capitalism.

jerednel 11y ago

I don't know about that. Lots of people make emotional decisions when it comes to money and will sell at the first sign of trouble. I think personal finance is one area where many are not rational.

justincormack 11y ago

That is not the technical definition of "rational" from economics though, which is what the models of markets are based on.

vonmoltke 11y ago

> I think they actually behave rationally, but all according to different fact-bases. People usually don't say "this is really dumb but I'll do it anyhow" most of the time, most of the time they really believe that they're doing something pretty rational. > But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate. Believing an action is a good idea or in your best interests when it actually isn't, or basing decisions on a warped perception of reality, is pretty much a textbook case of acting irrationally. Rational versus irrational is not about perception, it is about how well perception matches reality.

msandford 11y ago
So I hear what you're saying, but if that's the case then everyone, everywhere acts irrationally all the time. Because nobody is an oracle who knows how everything will play out. Is that the point that you're trying to make? Nobody has perfect information. I guess what I was trying to describe is that people might act foolishly, but they don't know it's foolish. And most of the time we only know it's foolish in hindsight. At the time it might have been brilliant, but they went broke so it wasn't. If they'd made billions, it would have been genius. So basically most people have "facts" that they believe to be true, and use them to make decisions that in light of those "facts" are smart. Few people disregard all facts and reasons and just do whatever, or do something counter to what their facts tell them. What I'm describing might not be the economics definition of rationality, but it's closely tied to the colloquial definition and the idea that pops into my head when someone says "rational".
- ska 11y ago
  I think it's slightly more subtle than that. Often people have the information they need to make a rational decision, but they choose to discount, ignore, or misinterpret it. No decision based on this choice can meaningfully be called "rational" without stretching the definition of rationality to the useless. This is quite different that making a rational decision based on incomplete or imperfect information. Modeling human beings as rational actors, even in aggregate, is often a deeply flawed approximation for this reason.
- 11y ago

BurningFrog 11y ago

I think that was a clumsy way of saying "unpredictably".

dragonwriter 11y ago

> I think they actually behave rationally, but all according to different fact-bases. Rationality, in the economic sense, involves (among other things) actors acting with accurate and complete information about all consequences of their market choices. Actors acting with "different fact-bases" are necessarily acting with inaccurate and/or incomplete information (because if it was both complete and accurate, it wouldn't differ between actors), and therefore, economically speaking, irrationally.

forgetsusername 11y ago
>Rationality, in the economic sense, involves (among other things) actors acting with accurate and complete information about all consequences of their market choices. No, it assumes that agents use all available information optimally. Complete information is not a requirement.
- dragonwriter 11y ago
  > No, it assumes that agents use all available information optimally. No, it is defined to include perfect information; actors using all available information optimally within the limits of their cognitive ability and considering, also, the opportunity cost of devoting resources to informationa evaluation and decision-making is a weaker alternative ("bounded rationality") to pure rationality.
  - forgetsusername 11y ago
    >No, it is defined to include perfect information "Complete" and "perfect" information are not the same thing. In games like poker, players have perfect information, but not complete information.
    - dragonwriter 11y ago
      > Complete" and "perfect" information are not the same thing. Perfect information, in the rational choice theory sense, is both complete in the sense that it covers all economic consequences that impact the experienced utilities of the decision maker positively or negatively out to an infinite time horizon, and free of errors over that entire scope, which is why I used "accurate and complete" as a less-formal equivalent of "perfect" upthread. > In games like poker, players have perfect information, but not complete information. In poker, players do not have perfect information in the rational choice theory sense (or the game theory sense, which is generally stated differently, but I think is actually equivalent.) Poker is, in fact, one of the canonical examples of a game featuring imperfect information.

grogenaut 11y ago

I'm gonna start a new yolo fund to capture this market!

mapt 11y ago

They behave rationally... the issue, more than informational assymmetry that you note, is that they're facing Newcomb-like problems: They're betting on what other people are going to bet on what they're going to bet on what other people are going to bet... And they're all trying to do it faster than the average participant, in order to attain advantage. Stocks aren't traded on some fundamental objective functions of accounting value and projected profits, they're traded purely on what people believe that other other people will be paying for the stock five milliseconds / five minutes / five days / five years from now. All at once, in a recursive mess. The professed theory is that some kind of objective truth underlies all this, and eventually generates some theory of value that all the speculators can latch on to - but that sort of investing is a tiny fraction of trading volume.

dekhn 11y ago
Whether agents act rationally is an open question in the economic literature. I claim most investors are irrational, but that the market appears to have an emergent behavior that makes it appear rational. Truly explaining this sort of emergent behavior in a feedback and partial information and game-player system with a trivial narrative about whether agents are rational seems to deny the inherent complexity of the system.

mbostleman 11y ago

I wonder if the impression that others are acting irrationally is really a symptom of the local knowledge problem on the observer's part. Or even the part of the actor. To the extent this is true, is acting on incomplete information "irrational" or is it "rational" but flawed.