6 ms·

In this world of quant-bots, I don't know how anyone can argue that we have a fully rational market. My understanding is that much of the progress in economics

• pachydermic 13y ago
  "Homo economicus" is still really important for macroeconomics. The reason for this is pretty simple: designing rich, large models is still hard to do and the practical limitations introduced by basing your assumptions on the idea that people act irrationally instead of rationally can make things too complicated to be of practical use. So in microeconomics or small models, people can practically accept and implement these (pretty obviously true) ideas that people don't behave rationally. But in large scale macroeconomic models it's hard to do. It would certainly be a lot easier if people just acted like computers...
  • icebraining 13y ago
    The issue is not just that models are hard. The claim of some economists is that while people behave irrationally, not everyone behaves irrationally all the time, so the issue is self-correcting as long as you have enough liquidity and participants in the market. It's like the law of large numbers; while a single transaction may have a completely wrong price, a sufficiently large number will average the irrationalities out.
    • pachydermic 13y ago
      If people make biased (http://en.wikipedia.org/wiki/Bias_of_an_estimator http://en.wikipedia.org/wiki/Bias_of_an_estimator) guesses you will still have a problem. I think that's often what's meant by "rational": that people, in aggregate, make unbiased guesses. The truth is not so - people get irrationally exuberant or are afraid to cut their losses, etc. These are problems of statistical bias of their estimations - and the opposite is assumed in many (most?) economic models.
    • Symmetry 13y ago
      Most of the time it's like that, but sometimes you have a situation like nominal loss aversion/sticky wages where humans are very consistent about their irrationality and that irrationality has very important effects. http://en.wikipedia.org/wiki/Sticky_wages http://en.wikipedia.org/wiki/Sticky_wages http://econlog.econlib.org/archives/2013/09/why_dont_wages.html http://econlog.econlib.org/archives/2013/09/why_dont_wages.h...
  • makomk 13y ago
    Simplifying models has always struck me as a particularly dangerous idea in economics, since a lot of the time it's actually profitable for economic actors to deliberately exploit the difference between your assumptions and reality.
• deleted 13y ago
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• alexeisadeski3 13y ago
  Quant bots make the market better by increasing liquidity.
  • jcalvinowens 13y ago
    I've always thought that's a sketchy claim. The market would have sufficient liquidity without the bots. More importantly, they're a huge waste of resources that produces nothing of economic value.
    • alexeisadeski3 13y ago
      There's no such thing as sufficient liquidity.
• Tyrannosaurs 13y ago
  I believe the argument (massively simplified) goes that if the market were truly irrational someone would be able to reliably beat it and there's not much evidence that that has happened.