Individual Irrationality and Aggregate Outcomes
Publikation: Working paper › Forskning
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Individual Irrationality and Aggregate Outcomes. / Fehr, Ernst; Tyran, Jean-Robert.
2005.Publikation: Working paper › Forskning
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TY - UNPB
T1 - Individual Irrationality and Aggregate Outcomes
AU - Fehr, Ernst
AU - Tyran, Jean-Robert
PY - 2005/8/30
Y1 - 2005/8/30
N2 - There is abundant evidence that many individuals violate the rationality assumptions routinely made in economics. However, powerful evidence also indicates that violations of individual rationality do not necessarily refute the aggregate predictions of standard economic models that assume full rationality of all agents. Thus, a key question is how the interactions between rational and irrational people shape the aggregate outcome in markets and other institutions. We discuss evidence indicating that strategic complementarity and strategic substitutability are decisive determinants of aggregate outcomes. Under strategic complementarity, a small amount of individual irrationality may lead to large deviations from the aggregate predictions of rational models, whereas a minority of rational agents may suffice to generate aggregate outcomes consistent with the predictions of rational models under strategic substitutability.
AB - There is abundant evidence that many individuals violate the rationality assumptions routinely made in economics. However, powerful evidence also indicates that violations of individual rationality do not necessarily refute the aggregate predictions of standard economic models that assume full rationality of all agents. Thus, a key question is how the interactions between rational and irrational people shape the aggregate outcome in markets and other institutions. We discuss evidence indicating that strategic complementarity and strategic substitutability are decisive determinants of aggregate outcomes. Under strategic complementarity, a small amount of individual irrationality may lead to large deviations from the aggregate predictions of rational models, whereas a minority of rational agents may suffice to generate aggregate outcomes consistent with the predictions of rational models under strategic substitutability.
KW - Irrationality
KW - Rationality
KW - Anomaly
KW - Aggregate Outcome
KW - Competitive Markets
KW - Money Illusion
KW - Base Rate Fallacy
U2 - 10.2139/ssrn.787666
DO - 10.2139/ssrn.787666
M3 - Working paper
T3 - IEW Working Paper
BT - Individual Irrationality and Aggregate Outcomes
ER -
ID: 241647246