Theory:
[Individual investors] will behave as rational, clear-thinking, self-interested individuals, each one a latter-day Adam Smith. They will make the market work efficiently, with their well-reasoned actions driving prices quickly to the "correct" level. . . .Reality:
People simply do not think in terms of some theoretical utility measurable in dollars and cents, and are not always rational and self-interested. The refutation of this one assumption of modern financial theory has in the past twenty-five years created a fertile new field of inquiry, called behavioral economics.—Benoit Mandelbrot, The (mis)Behavior of Markets
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I have encountered the Economic Rational Man in real life. They act in their own interest without emotion or sentiment. Their actions are logically consistent. They are psycopaths.
Posted by: Max | 01 March 2008 at 09:55