4 ms·

Wouldn't a market always act rationally, by definition?

yoha 10y ago
You are confusing two things. Here are plausible definitions: * market: system for trading assets between willing participants * economics: modeling the behavior of markets assuming rational behavior of participants The definition of markets has nothing to do with rationality.
- jsprogrammer 10y ago
  Market: participants freely exchange goods Rational: subject acts according to their own utility function Freely acting is equivalent to rationally acting, which is precisely where markets can exist. E: Downmod without leaving a comment. Classic HN.
  - civilian 10y ago
    Not a downvoter, but: Freely acting != rational acting. People often take actions on bad information, or on bad analysis of good information.
    - jsprogrammer 10y ago
      I guess the problem is that I'm the only one in this discussion that has offered a definition of rational. Taking action on bad information or analysis may be rational for some utility functions.
      - civilian 10y ago
        Yeah, I was thinking about that after I wrote my comment. I suppose that rational could just be defined as "what a person does", since they must have been trying to optimize for _something_. But there must be some universal optimial for a given utility function, right? Like: choosing to buy a BMW when your utility function is a looking for a cheap car is just simply irrational or a mistake. Here's a good one: All of my high school teachers (and my parents) encouraged me to study biochemistry in college. They assured me there'd be a good career for me afterwards. But they were kinda wrong, and I had executed my utility function (what's a major that will give me interesting and good work) on bad input. I acted rationally, but would you say that my decision was a rational one?
        jsprogrammer 10y ago
        It was rational because you valued what your teachers and parents thought. All value is subjective, so you cannot define a universal optimum. To say whether something was a rational decision requires evaluating the subject's utility function at the time of the decision. This is something only the subject can do. Trying to judge something after the fact is very difficult. What good input could you have used when you made the decision (or while you continued to execute it)? Making mistakes in reasoning and/or lacking information that would allow for making a decision at a higher perceived utility does not make one irrational. An irrational decision is one where an action determined to have the most utility is not taken.
gefh 10y ago
Unfortunately it's often rational to act irrationally.
ArkyBeagle 10y ago
Not so much.
alecbaldwinlol 10y ago
Without perfect information, market participants can act irrationally. This is why Ethiopian farmers sell their coffee beans for pennies/kilo, while Starbucks charges $5/gram (made up numbers).
- jsprogrammer 10y ago
  Why would Ethiopian farmers sell for so little if they could sell for more?
  - gherkin0 10y ago
    Some possibilities: * They don't know that their beans can actually sell for so much * They don't know how to sell their beans for higher prices (e.g. they don't have access to the right middlemen) * They aren't coordinated enough and undercut each other when dealing with the middlemen. * Starbuck's premium prices may have little to do with the beans themselves
    - jsprogrammer 10y ago
      None of those would necessarily indicate that the farmers are acting irrationally in the previously described exchanges.
- civilian 10y ago
  This is not a good example. Distribution, branding and maintaining retail outlets make most of the cost. Ethiopian farmers can't sell their beans for dollars because: * They haven't shipped them across the ocean * They don't have warehouses to store them in * They don't have a retail store to sell them in * Nobody knows the quality or consistency of Ethiopian Joe's coffeebeans, but they know that Starbucks is consistent good. A better example of irrational acting is that: MLB tickets can be sold for hundreds of dollars, even though professional baseball is the most boring thing to watch, we barely have good enough eyes to see what's happening from that far away anyway, and you'll have to pay 2x for anything you eat or drink. Also Beanie Babies. Buying beanie babies and tulip bulbs was really irrational acting.
josephlord 10y ago
Only if mainstream economic theory was correct, unfortunately it is deeply flawed and much of it depends on unrealistic (and at times inconsistent) assumptions.

yoha 10y ago

You are confusing two things. Here are plausible definitions: * market: system for trading assets between willing participants * economics: modeling the behavior of markets assuming rational behavior of participants The definition of markets has nothing to do with rationality.

jsprogrammer 10y ago
Market: participants freely exchange goods Rational: subject acts according to their own utility function Freely acting is equivalent to rationally acting, which is precisely where markets can exist. E: Downmod without leaving a comment. Classic HN.
- civilian 10y ago
  Not a downvoter, but: Freely acting != rational acting. People often take actions on bad information, or on bad analysis of good information.
  - jsprogrammer 10y ago
    I guess the problem is that I'm the only one in this discussion that has offered a definition of rational. Taking action on bad information or analysis may be rational for some utility functions.
    - civilian 10y ago
      Yeah, I was thinking about that after I wrote my comment. I suppose that rational could just be defined as "what a person does", since they must have been trying to optimize for _something_. But there must be some universal optimial for a given utility function, right? Like: choosing to buy a BMW when your utility function is a looking for a cheap car is just simply irrational or a mistake. Here's a good one: All of my high school teachers (and my parents) encouraged me to study biochemistry in college. They assured me there'd be a good career for me afterwards. But they were kinda wrong, and I had executed my utility function (what's a major that will give me interesting and good work) on bad input. I acted rationally, but would you say that my decision was a rational one?
      - jsprogrammer 10y ago
        It was rational because you valued what your teachers and parents thought. All value is subjective, so you cannot define a universal optimum. To say whether something was a rational decision requires evaluating the subject's utility function at the time of the decision. This is something only the subject can do. Trying to judge something after the fact is very difficult. What good input could you have used when you made the decision (or while you continued to execute it)? Making mistakes in reasoning and/or lacking information that would allow for making a decision at a higher perceived utility does not make one irrational. An irrational decision is one where an action determined to have the most utility is not taken.

gefh 10y ago

Unfortunately it's often rational to act irrationally.

ArkyBeagle 10y ago

Not so much.

alecbaldwinlol 10y ago

Without perfect information, market participants can act irrationally. This is why Ethiopian farmers sell their coffee beans for pennies/kilo, while Starbucks charges $5/gram (made up numbers).

jsprogrammer 10y ago
Why would Ethiopian farmers sell for so little if they could sell for more?
- gherkin0 10y ago
  Some possibilities: * They don't know that their beans can actually sell for so much * They don't know how to sell their beans for higher prices (e.g. they don't have access to the right middlemen) * They aren't coordinated enough and undercut each other when dealing with the middlemen. * Starbuck's premium prices may have little to do with the beans themselves
  - jsprogrammer 10y ago
    None of those would necessarily indicate that the farmers are acting irrationally in the previously described exchanges.
civilian 10y ago
This is not a good example. Distribution, branding and maintaining retail outlets make most of the cost. Ethiopian farmers can't sell their beans for dollars because: * They haven't shipped them across the ocean * They don't have warehouses to store them in * They don't have a retail store to sell them in * Nobody knows the quality or consistency of Ethiopian Joe's coffeebeans, but they know that Starbucks is consistent good. A better example of irrational acting is that: MLB tickets can be sold for hundreds of dollars, even though professional baseball is the most boring thing to watch, we barely have good enough eyes to see what's happening from that far away anyway, and you'll have to pay 2x for anything you eat or drink. Also Beanie Babies. Buying beanie babies and tulip bulbs was really irrational acting.

josephlord 10y ago

Only if mainstream economic theory was correct, unfortunately it is deeply flawed and much of it depends on unrealistic (and at times inconsistent) assumptions.