Individual Irrationality and Aggregate Outcomes
- Author(s)
- Ernst Fehr, Jean-Robert Tyran
- Abstract
In their personal lives, many economists recognize that they are surrounded by individuals who are less than fully rational. In their professional lives, however, economists often use models that examine the interactions of fully rational agents. To reduce the cognitive dissonance of this situation, many economists believe that interactions in markets will correct or offset individually anomalous behaviors—although the reasons for this belief are often not clearly spelled out. This paper presents evidence indicating that "strategic complementarity" and "strategic substitutability" are important determinants of aggregate outcomes. Under strategic complementarity, a small amount of individual irrationality may lead to large deviations from the aggregate predictions of rational models; under strategic substitutability, a minority of rational agents may suffice to generate aggregate outcomes consistent with the predictions of rational models. Thus, the presence of strategic substitutability or complementarity seems to be a key condition in determining when a population that is heterogeneous with regard to rationality reaches either a "rational" or an "irrational" outcome.
- Organisation(s)
- Department of Economics, Vienna Center for Experimental Economics
- External organisation(s)
- Universität Zürich (UZH)
- Journal
- Journal of Economic Perspectives
- Volume
- 19
- Pages
- 43-66
- No. of pages
- 24
- ISSN
- 0895-3309
- DOI
- https://doi.org/10.1257/089533005775196651
- Publication date
- 2005
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502045 Behavioural economics
- Portal url
- https://ucrisportal.univie.ac.at/en/publications/individual-irrationality-and-aggregate-outcomes(ff6cd590-a2b7-41c2-b927-9f31d677f213).html