Can Markets Be Rational When Humans Are Not

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Can markets be rational when humans are not? Specifically, the documentary asks: “When it comes to money, are our decisions precisely calculated or are they based on emotions.” To answer this question, we must look at the goal of the market and compare it to evidence and statistics that may or may not support it. In addition, we must see how humans act irrationally and see how it affects the market. To start, we define the market as a group of buyers and sellers, where buyers determine the demand and sellers determine the supply. The goal of the market is simple: buyers try to find cheap prices depending on needs and wants while suppliers try to sell their goods at a reasonable price depending on the market factors. Why is it then that humans are irrational? The first example is shown in the beginning of the…show more content…
In his book, “Wealth of Nation”, he states that people behave rationally. This rationality serves a individuals well being and his/her thought processes on how to get the most benefit. Looking back to the twenty dollar auction, it is clear that paying twenty-eight dollars for twenty dollars is not rational to Adam Smith’s theory. This wraps all together that human emotion is the reason for these “bubbles” and is why Smith’s theory does not hold true. Further, you might think emotion should not be involved in the amount of money one makes. Money is definitely a motivating factor that any rational person would try to strive for. The documentary poses an experiment for human emotion. Subjects were given a travel mug and asked to estimate the price. The average was six dollars. They were then given the mugs for free. After an hour when they asked what they would see it for, the average increased to nine dollars. This is supposed to show that the pleasure of owning something increases the price. If the subjects were rational, they'd be willing to sell it for the same

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