[ExI] Psychology of markets explanations

[BillK]

On 5/31/09, Stathis Papaioannou wrote:
<snip>
> Being a "rational agent" implies a certain psychological state. If
>  many participants in the market were "irrational" then it would change
>  the market, perhaps to their detriment and everyone elses, as we see
>  in boom and bust cycles. And even if everyone conforms to a definition
>  of "rational" you still have to explain the actual demand for a
>  product, the level to which the demand will be sensitive to price
>  changes, what the beliefs about future prices are and how this will
>  affect demand, and so on. Psychological states and physical resources
>  are the basic interacting elements out of which the economy emerges. I
>  don't think there is anything radical in this statement.
>

See:
<http://www.nytimes.com/2009/04/19/books/review/Uchitelle-t.html>

Irrational Exuberance
By LOUIS UCHITELLE       Published: April 17, 2009

Look around you, George A. Akerlof and Robert J. Shiller say. The
second coming of the Great Depression is, like the original, a direct
result of animal spirits. If only we had factored those turbulent
emotions into economic theory, we might not be repeating the earlier
tragedy.

Akerlof, a Nobel laureate, and Shiller, a good bet to become one, are
prominent mainstream economists. They don’t deviate easily from
orthodox theory, with its allegiance to the proposition that people
are essentially rational, well informed and unemotional in the
numerous transactions that shape the economy. But in “Animal Spirits,”
they have deviated — and they have done so just as mainstream theory
self-destructs.

There was nothing rational, well ­informed or unemotional about the
behavior that has all but collapsed the economy. That leaves most of
America’s economists without a believable framework for explaining how
we got into this mess. Akerlof and Shiller are the first to try to
rework economic theory for our times. The effort itself makes their
book a milestone.
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BillK