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A comment on TWTR. Parent comment

Re:TWTR by icebraining on Thursday November 07, 2013 @12:51PM (#6690959)
The issue is not just that models are hard. The claim of some economists is that while people behave irrationally, not everyone behaves irrationally all the time, so the issue is self-correcting as long as you have enough liquidity and participants in the market.

It's like the law of large numbers; while a single transaction may have a completely wrong price, a sufficiently large number will average the irrationalities out.

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Re:TWTR by pachydermic on Thursday November 07, 2013 @12:58PM (#6691020)
If people make biased (http://en.wikipedia.org/wiki/Bias_of_an_estimator) guesses you will still have a problem. I think that's often what's meant by "rational": that people, in aggregate, make unbiased guesses.

The truth is not so - people get irrationally exuberant or are afraid to cut their losses, etc. These are problems of statistical bias of their estimations - and the opposite is assumed in many (most?) economic models.

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Re:TWTR by Symmetry on Thursday November 07, 2013 @03:22PM (#6692125)
Most of the time it's like that, but sometimes you have a situation like nominal loss aversion/sticky wages where humans are very consistent about their irrationality and that irrationality has very important effects.

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

http://econlog.econlib.org/archives/2013/09/why_dont_wages.h...

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