Tuesday, October 15, 2019

Is rationality real?

In financial markets where standard and divisible instruments are traded, it has been shown that rational outcomes are more likely. Even though individuals act irrationally most of the time, the aggregation of individuals, markets in general, tend toward rational outcomes. It appears that this is unlikely to be true in real markets. In a recent experiment in the US, three entities - one from radio, one from TV and one from a powerful position, have been able to create irrational responses from a very large population - perhaps as much as 50 million. All the "broadcasters," had to do is to repeat incorrect information over and over again. This has broad implications for rationality, policy and the future of humanity.

Rationality is not real in non-financial markets. Humans tend to clump, perhaps an evolutionary trait that kept small clans together. Early in homo-sapien progression, identifying and protecting the clan was dominant. Although early humans used more sophisticated attributes, the modern variety seems to have fallen into using surface heuristics such as the color of the skin, eyes, and hair. The fundamental reason three loudspeakers could lead a large population down an irrational rabbit hole is that they used ideas from hundreds of thousands of years ago. This is not something the "intellectuals," understand. It is not that there aren't rational solutions to the problems we face but rather if such choices align with the human brain created much before modern times. 

Real markets cannot assume rationality. Anybody who assumes rationality exists and design campaigns around that is bound to fail.

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