miércoles, 1 de julio de 2009
Bubble Science
Gary Stix looks at recent developments in the science of human decision-making and economic bubbles. Stix examines the growing influence of behavioral economists, the neuroscience behind various economic phenomena, and the research of George Akerlof and Robert Shiller, Cass Sunstein and Richard Thaler, and Andrew Lo.
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Are bubbles irrational?
ResponderEliminarTests of rationality are made using a background model of consumer preferences. Economists have called consumer behavior "rational" because data about large groups of lots of consumers over long periods of time is consistent with some "average consumer" within the group behaving rationally. But does any individual consumer within the group actually have the prefererences of this model "average consumer"? We do not know.
Worse yet, because we do not know what individuals actually prefer, but only what some "average individual" prefers, we have no way of understanding how individuals might influence each others' preferences over time.
Maybe bubbles are rational. I don't think we've seen enough data on individual preferences to know.
Bubbles are rational just like everything else. However, it's rationality is so complex and perplexing that people find it irrational if you really don't understand it. It is rational for the same reason why we termed it as "bubbles" on the first place and has long gone admitted its existence. It is further rational because it is predictable specially by people or economists who actually achieved a higher and broader understanding of what a bubble is, when and why it occurs, its importance and how to prevent it. Everything happens for a reason. So why would we consider bubbles an exception. Just my plain 2 cents. ;)
ResponderEliminarBubbles are rational in financial markets. Consider the so called "Nasdaq" bubble. Rational investors decide to hold positions in stocks in which a bubble is likely to be present because the expected excess return on their investment compensates for the risk of a bubble burst. Furthermore, it is possible to show, under the assumption of investors`rationality, that the premium for investing in such assets increases with the size of a bubble. So, even though the likelihood of a burst, conditional on haven
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