Exuberant Irrationality (original) (raw)
Related papers
A Rational Theory of Irrational Exuberance
2008
The arrival of new, unfamiliar, investment opportunities-e.g., internet commerce, emerging markets, novel …nancial instruments-is often associated with large, "exuberant," movements in asset prices and real investment. While irrational explanations of these phenomena abound, in this paper we show that the dispersion of information that is likely to surround these new, unfamiliar investment opportunities may help explain these phenomena within an otherwise canonical, fully rational, neoclassical model of the interaction of …nancial markets and the real economy. On the positive front, we identify a mechanism that ampli…es the response of the economy to noise (correlated, but rational, errors in assessments of the fundamentals), while at the same time formalizing the idea that "in ‡ated prices"and "exuberant investment"may feed one another during these episodes. This mechanism rest on the property that, when information is dispersed and only then, …nancial markets look at aggregate investment as a signal of the underlying fundamentals. On the normative front, we document that this ampli…cation is a symptom of constrained ine¢ ciency: there exist policy interventions that can improve welfare without requiring the government either to have superior information than the market or to centralize the information that is dispersed in the economy.
Su bjectivity, 2010
Drawing on Freud's late work, I argue that the social traumas created by neoliberalism bring about perverse modes of subjectivity. When a truth is too painful to bear, Freud argues, we substitute for truth a less painful lie, a disavowal that, when regularly practiced, can issue in perversion. I argue that irrational exuberance, the shared delusion in the United States that, for example, housing prices and the stock market must always go up, ought not be attributed to the greed of 'human nature' but rather must be understood in its social context: as a response to the abandonment of the citizenry by government and by the free market fundamentalism that, after the mid-1970s, no longer provided even the bare minimum of security and safety offered by the US form of the welfare state. Clinical material illustrates some of the ways that neoliberal versions of subjectivity appear in symptoms and in the relational dynamics of treatment.
The Philosophical Forum, 2009
We reflect that somewhere in the child, somewhere in the adult, there is a hard, irreducible, stubborn core of biological urgency, and biological necessity, and biological reason, which culture cannot reach and which reserves the right, which sooner or later it will exercise, to judge the culture and resist and revise it.-Lionel Trilling 1 These remarks were suggested by Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely, the Alfred P. Sloan Professor of Behavioral Economics at MIT. 2 The book is designed to be "popular," which does not affect its intellectual rigor, but does make it more jokey than it might otherwise be (and than I like) and reminds me of a recent comment in The Economist: "Watching Microsoft in the company of Google and Facebook is like watching your dad trying to be cool" 3 (June 28-July 4, 2008). This, I offer, as an unfair and probably irrelevant comment, though matters of intellectual style and culture may, as emerges here and there below, influence the extent to which we succumb to various forms of irrationality. (Authors for the most part lose control of titles, a fortiori subtitles, but, in any case, it would have been better to have said, less sweepingly but more accurately, "Some of Our Decisions.") Rationality used to be, perhaps still is, a philosophical topic, going back at least to Aristotle, who defined humans as rational animals, but also social animals, without explicitly settling the matter of whether the two definitions were
A Model of Near-Rational Exuberance
Macroeconomic Dynamics, 2010
We study how the use of judgement or "add-factors" in forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in a standard self-referential environment. Local indeterminacy is not a requirement for existence. We construct a simple asset pricing example and find that exuberance equilibria, when they exist, can be extremely volatile relative to fundamental equilibria.
Traditional scientific views of rationality are couched in economic terms; choosing an option that does not maximize expectancy is irrational. The construct has been extended metaphorically so that the term " irrational " now describes any decision deemed foolish by the evaluator. For everyday decisions that do not involve money, a decision maker's utilities are generally not known to an onlooker. Therefore, the pejorative label may be applied inappropriately because the evaluation is distorted by incorrect assessment of the decision maker's goals. We tie this linguistic confusion to the predominance of gambling studies within decision making research. For non-economic decisions, we propose an alternative definition, one inspired by a theory of everyday decisions. We label a decision irrational if is inconsistent with a policy previously established by the decision maker. The hierarchical structure of everyday decisions, along with the descriptive multiattribute utility model, are core elements in the theory presented by Weiss et al. (2010). The theory holds that fast changing considerations are a crucial element in the evaluation of decision options. The momentary salience attached to a consequence can change with current, often fleeting circumstances. An option that would usually be rejected can quickly become too tempting to resist. Most people exhibit this kind of irrationality, violating a personal policy, some of the time—and they are not necessarily foolish to do so.
The Limit between the Rational and Irrational Behaviour in the Economic Science
2012
Although three years have passed since the onset of the deepest recession from 1929, the most world economies are still fragile, the slipping into another recession being imminent for many of them. "It is a sin to waste a crisis" without learning something of the causes that generated it, said Nouriel Roubini, but this time the problems facing the economic science are related even to the own concepts of the promoted model, while to change something in the economy it is need a reconceptualization of the economic science. The context of the current economic model has failed to anticipate the economic crisis and fails to propose sustainable measure of the economic recovery and this because it starts from the wrong premises, such as assuming that the behavior of the subjects within the market is always rational. In this work we will demonstrate that the irrational behavior of the participants to the economic life has led to imbalances of these markets and we will try to distinguish between the rational and the irrational economic behaviors, to identify the operating area of economic science at this time.
Financial Fragility with Rational and Irrational Exuberance
Journal of Money, Credit and Banking, 1999
This article formalizes investor rationality and irrationality, exuberance and apprehension, to consider the implications of belief formation for the fragility of an economy's financial structure. The model presented generates a financial structure with portfolio linkages that make it susceptible to contagious financial crises, despite the absence of coordination failures. Investors forecast the likelihood of loss from contagion and may shift preemptively to safer portfolios, breaking portfolio linkages in the process. The entire financial structure collapses when the last group of investors reallocates their portfolios. If some investors are irrationally exuberant, the financial structure remains intact longer. In fact, financial collapse occurs sooner when almost all investors are rationally exuberant than when they are irrationally exuberant. Additionally, a financial crisis initiated by real shocks is indistinguishable from one caused solely by the presence of rationally apprehensive investors in a fundamentally sound economy. Policies that make portfolio linkages more resilient can improve welfare.