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Have markets ever been rational? They’re typically consistent, and you can make money arbitraging on inconsistencies, but rationality in markets is an economist
by fnordpiglet 4y ago
Have markets ever been rational? They’re typically consistent, and you can make money arbitraging on inconsistencies, but rationality in markets is an economists delusion.
- __MatrixMan__ 4y agoIf they are rational then I think the corelary is that they hate us. So I prefer to assume that they're irrational.
- DannyBee 4y agoNo, they haven't. That said, economists have lots of delusions about markets (and i point them out), but to be fair, their rationality claim is usually about efficiency, rather than some form of more general rationality. IE rationality is things like "excess pricing opportunities are rare and go away quickly" rather than rationality is "people do generally sane things"
- fnordpiglet 4y agoYes, that’s what I mean by consistency. Put call parity will generally exist because it’s consistent with expected behavior, otherwise market participants will capture the inefficient pricing and bring it back to consistency. Here I mean the market has some structure and relationships between instruments and in so far as prices are consistent with the structure of the market and it’s instruments they’re “efficient,” or perhaps rational. But I think when people say “is the current marker rational or is it exuberant?” they don’t mean consistent / efficient, they mean “aligned with fundamentals in a way that makes rational sense to an economist.”