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Re: Need some help.

Vanitas Nomen — Thu, 13 Dec 2012 13:30:53 GMT

"An aquarium is man made as are financial markets.

They work only if designed correctly in the first place."

Financial markets? What exactly are you referring to when you, for the first time in this thread, introduce 'financial' in front of 'market'. Anenome was referring to markets in general, i.e. 'free' markets. Anyhow, markets aren't designed, by definition there is no 'designer' hence it's 'free'. I do not accept the equivocation that because man 'makes' the market that it is thus designed as such. Man 'made' language, but there was no 'designer' of the English language.

Logical vs Rational - whats the difference?

Quite a scism between the two concerning AE. I don't recall Mises ever referring to action as logical except that is given that EVERY action is logical(for the framework of our minds are logical). So when would one use the term rational?
If I stated to you that my goal(end) was to murder my neighbor by way of tickling her for 30 seconds with a feather(means) you might say that that is not a rational method. A rational method would be to point my loaded 9mm at her temple and squeeze the trigger.

I'm just gonna go ahead and say that one always merely make judgements of value on another's action.
I could go to the 99 cent store and buy my trashbags, dishsoap, sponges, and other household items of that nature for 2 to 3 times cheaper than what I pay for at Ralph's. So why don't I go the 99 cent store? Because I value my free time more than the extra 45 minutes it would take once a month to grab those items and save $10. You can call me 'irrational' for that - but it doesn't mean squat.

Re: Need some help.

Anenome — Tue, 11 Dec 2012 22:06:22 GMT

What I mean is, despite all the attempts at manipulation, in a free market all you need is one person with clarity in an area, and the manipulation attempts of others strike that person as a huge opportunity.

For instance, when Home Depot was started, it was done by two guys who worked for a hardware chain and had an idea for high-volume sales.

No one thought they could be making a profit theire first years--their prices were too low. But of course they were.

Because they had a new business model the others didn't understand.

Two guys with clarity via the numbers upended an entire products sector. Same with Walmart.

Manip all you want, if you're a small grocer in a medium-size town and Walmart moves into town, you're gonna have a bad time :P

Re: Need some help.

complience — Tue, 11 Dec 2012 11:06:27 GMT

An aquarium is man made as are financial markets.

They work only if designed correctly in the first place.

Logical vs Rational - whats the difference?

When behavioral economists refer to an illogical/irrational behavior it is with reference to utility theory

So whenever a free agent pays for a good or service in full knowledge that the expected utility value will be less than the purchase price.

Re: Need some help.

Aristippus — Tue, 11 Dec 2012 10:27:51 GMT

If only mustang and kylio were here. Oh, wait...

Re: Need some help.

Vanitas Nomen — Tue, 11 Dec 2012 10:06:56 GMT

Logical doesn't equal rational, and I very much agree with what you had said Wheylous.

Complience seems to be using rational and logical interchangeably i.e. "Your Wax example is more one of risk aversion (also illogical)".
This is a common objection to AE, but often founded on a misconception of what Mises meant in regard to rationality:

"The assertion that there is irrational action is always rooted in an evaluation of a scale of values different from our own. Whoever says that irrationality plays a role in human action is merely saying that his fellow men behave in a way that he does not consider correct."

I really don't understand the unstable aquarium/fish dying analogy.

Re: Need some help.

complience — Mon, 10 Dec 2012 17:36:16 GMT

The science of Behavioral economics is comparatively new and all the causality is not fully understood.

It would be also presumptuous to think that new biases are as yet not undiscovered.

You are right there is nothing to prevent another competitor from manipulating the same physiological phenomenon to their advantage - thats the whole point.

Your Wax example is more one of risk aversion (also illogical) rather than completely unconscious behavior such as anchoring

Although I have less of a problem with people choosing to pay more to avoid risk or gain increased status from a purchase than randomly linking numbers together to decide on a price.

I love a good metaphor and your are right in part comparing free markets to the sea with unpredictable waves and storms that eventually pan out.

But this is a sea of our own making, so its more like an unstable aquarium in which the fish keep on dying.

Re: Need some help.

Anenome — Mon, 10 Dec 2012 01:15:19 GMT

Complience: all those effects are widely known, and while they do have an effect, it's not an overarching or long-term effect.

What buyer pricing-irrationality via market training, or w/e, ultimately produces is a chance for a competitor who knows the real facts to walk in and undercut the current market leader in some way.

There are some products that people want to be very high quality and will only spend a minimum amount on, like high-end car wax. Truth is, car wax is pretty cheap to make. If you price is very low then people will avoid it because they don't want to save a few dollars on something they're going to trust with a $5,000+ awesome paint-job.

So, for high-end car wax, quality is more important than price. And if one market competitor chooses to use regular quality wax and jack the price way up, people will buy it, thinking price corresponds to quality in this area, but in due time either people will realize that quality wax doesn't need to cost that much, or a high-quality competitor will enter which can actually justify that price and thus defeat the previous wax.

The market, and customer perceptions and biases, are like an ocean. Water seeks the low-point, but you never do actually end up with a smooth ocean, do you. It's always roiling and jostling, and the same is true of the market and market participants. But the overall trend is going to be pretty damn rational. What you surely won't have is waves suddenly breaking the laws of physics and floating upwards :P

Re: Need some help.

Wheylous — Mon, 10 Dec 2012 01:04:58 GMT

And how do you know it's not?

Maybe they just hadn't seen the food in the same light.

You think that rational means logical. I don't think that's how economists use it.

Re: Need some help.

complience — Mon, 10 Dec 2012 00:52:55 GMT

A great example is 'Anchoring"

http://priceless-the-book.blogspot.co.uk/2009/10/10-for-10.html

Humans use a memory process called 'chunking' to save space and group items together, so often reference unlinked numbers as related supermarkets know this fact and look for any opportunity to put large numbers in your eye line.

1000 points here, 50% off there, 100g free

Then figure of £5.00 for a can of beans seems small and the buyer is happy they are getting a bargain.

Is that Rational?

Re: Need some help.

Anenome — Mon, 10 Dec 2012 00:22:41 GMT

Lookup the Davis-Bacon Act, ask yourself whether it was government or the free-market that passed that law.

Actually that's obvious on its face :P

Re: Need some help.

Wheylous — Sun, 09 Dec 2012 23:59:00 GMT

Yes, though I might regret my choice of words a little.

What I meant is that just because people don't use probabilities like math does, it doesn't mean they're irrational. It means that models based on expectations (sum over outcomes weighted by probabilities) are not very useful.

Re: Need some help.

Vanitas Nomen — Sun, 09 Dec 2012 23:52:35 GMT

@Wheylous One's mathematics are only as good as their assumptions are valid, and I think you are correct in saying that the models are based on assumptions that, more or less, "suck". Amiright?

Re: Need some help.

Wheylous — Sun, 09 Dec 2012 22:10:12 GMT

Why is being biased irrational?

Re: Need some help.

complience — Sun, 09 Dec 2012 21:19:49 GMT

True I am not stating that humans are not motivated by self interest.

I wouldn't want to over simplify the findings of indepth studies into complex pysche of human decision making into a one line example.

I'm talking about the many cognitive biases such as loss aversion, endowment & framing effects.

But really there are too many list :

http://en.wikipedia.org/wiki/List_of_biases_in_judgment_and_decision_making

Really recommend reading Thinking, Fast and Slow by Daniel Kahneman by Kahneman and Priceless by Poundstone.

Re: Need some help.

Wheylous — Sun, 09 Dec 2012 16:27:37 GMT

I think he means that humans don't fit neoclassical models.

In that case, I think it's more appropriate to say not that humans are mathematically irrational, but that the models just suck.