[ExI] Psychology of markets explanations

Stathis Papaioannou stathisp at gmail.com
Sun May 31 01:31:48 UTC 2009

2009/5/31 painlord2k at libero.it <painlord2k at libero.it>:
> Il 30/05/2009 4.50, Stathis Papaioannou ha scritto:
>> The law of supply and demand is an emergent phenomenon supervening on
>> social psychology. The supply-demand curve would be affected if people
>> prefer to buy more of a product if it is more expensive, for example.
> Where do you see this happen?
> I never saw this happen in 40 years of my life.

It might happen with certain exclusive luxury items. It also happens
sometimes with financial market, which is what leads to bubbles. The
price of a security goes up, and demand for it also goes up because
speculators believe its rise is an indication that it will continue
rising. But that is not the point: the point is that it is peoples'
actual psychology, whatever it might be, that causes them to behave in
a particular way, leading to the observed economic laws. If you had an
elaborate computer model of the economy and you could change any
variable, changing psychology would change the outcome.

> When will be have phycology of physics explanations?
> For example, if people believed that air planes don't work, there would not
> be air planes flying, so the laws of aerodynamics could be told to not work,
> because air planes can not fly if people don't believe they will fly.

The world would be very different if there were no planes flying due
to peoples' beliefs. In order for planes to fly not only do the laws
of physics have to make it possible, the planes must also be built.

> The supply-demand curve work perfectly with rational agents.
> Irrational agents will be weeded out of the market as unfit (they will pay
> more than needed and ask less than needed)
> Any explanation that say the supply-demand curve is due only to
> psychological causes require that ALL agents must be always irrational (a
> market of fools).
> A single rational agent would gain more than all the others and would
> control the market given enough time. Agents that are partially rational
> would have a success proportional to their rationality.

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.

Stathis Papaioannou

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