Econ 001 Extra Credit
Texia H. Saquicela F.
Professor Keskinel.
March 29, 2015
Rational Markets
Lead by irrational Humans
After watching the documentary “Mind over Money” it became clear to me that generally, people tend to let emotions get in the way of their financial decisions. According to the documentary, there is a model that describes how people behave as if they were calculating their benefit prior to any purchase. However, they do not actually make those calculations. The documentary explains how there are two types of economists. There are the rationalists who believe people make rational economic decisions, and the behavioralist who believe the economic decisions made by people are based on their behavior. Now according to the rationalists markets can indeed be rational even though humans are not. However, according to the behavioralists if humans running a market do not make rational decisions, then the market cannot be rational itself. In “Mind over Money” there are a few experiments where it shows how people do not make rational economic decisions. For instance, it showed how someone allowed their competitive self to pay USD $28 for a USD $20 offered in a bid. This occurred because that person did not want to loose the bid, and he offered even a higher price for the item that have been bidden. Therefore, allowing his feelings to intervene in that particular economic decision.
However, that was only two people out of twelve; making it ≈17% which is a very low number. In other words, if only 17% of the humans in a market are making irrational decisions, then those
ECON 001
SAQUICELA !1
decisions are not going to have a big impact on the level of rationality of the market. Although some humans in the market are making irrational decisions, the market remains rational.
On the other hand, the rationalists strongly believe in Adam Smith’s doctrine of
Economics. “Economics from the very beginning [has] been the study of rational greedy people, making decisions to try to
Professor Keskinel.
March 29, 2015
Rational Markets
Lead by irrational Humans
After watching the documentary “Mind over Money” it became clear to me that generally, people tend to let emotions get in the way of their financial decisions. According to the documentary, there is a model that describes how people behave as if they were calculating their benefit prior to any purchase. However, they do not actually make those calculations. The documentary explains how there are two types of economists. There are the rationalists who believe people make rational economic decisions, and the behavioralist who believe the economic decisions made by people are based on their behavior. Now according to the rationalists markets can indeed be rational even though humans are not. However, according to the behavioralists if humans running a market do not make rational decisions, then the market cannot be rational itself. In “Mind over Money” there are a few experiments where it shows how people do not make rational economic decisions. For instance, it showed how someone allowed their competitive self to pay USD $28 for a USD $20 offered in a bid. This occurred because that person did not want to loose the bid, and he offered even a higher price for the item that have been bidden. Therefore, allowing his feelings to intervene in that particular economic decision.
However, that was only two people out of twelve; making it ≈17% which is a very low number. In other words, if only 17% of the humans in a market are making irrational decisions, then those
ECON 001
SAQUICELA !1
decisions are not going to have a big impact on the level of rationality of the market. Although some humans in the market are making irrational decisions, the market remains rational.
On the other hand, the rationalists strongly believe in Adam Smith’s doctrine of
Economics. “Economics from the very beginning [has] been the study of rational greedy people, making decisions to try to