The Market: Catalyst for Rationality and Filter of Irrationality

John List and Daniel Millimet

No 504, Departmental Working Papers from Southern Methodist University, Department of Economics

Abstract: Assumptions of individual rationality and preference stability provide the foundation for a convenient and tractable modeling approach. While both of these assumptions have come under scrutiny in distinct literatures, the two lines of research remain disjointed. This study begins by explicitly linking the two literatures while providing insights into perhaps the central issue facing behavioral economics today: to what extent does market experience mitigate various forms of individual irrationality? We find considerable evidence that the market is a catalyst for rationality. The study then focuses on aggregate market outcomes by examining empirically whether individual rationality is a prerequisite for market efficiency. Using field data gathered from more than 380 subjects of age 6-18 in multi-lateral bargaining markets at a shopping mall, we find that the market is a filter of irrationality—even when markets are populated solely by irrational buyers, aggregate market outcomes quickly converge to neoclassical predictions.Length: 44 pages

JEL-codes: C93 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-exp and nep-hpe
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://ftp1.economics.smu.edu/WorkingPapers/2005/millimet/rats.pdf (application/pdf)

Related works:
Journal Article: The Market: Catalyst for Rationality and Filter of Irrationality (2008)
Working Paper: The market: Catalyst for rationality and filter of irrationality (2008)
Working Paper: The Market: Catalyst for Rationality and Filter of Irrationality (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:smu:ecowpa:0504

Access Statistics for this paper

More papers in Departmental Working Papers from Southern Methodist University, Department of Economics Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496.
Bibliographic data for series maintained by Ömer Özak ().