Economics: Rationalist vs Behavioral Views & Efficient Markets

This economics assignment contrasts behavioral and rationalist views on markets, highlighting how behavioral economics incorporates insights from various disciplines to understand economic decision-making, while rational choice theory assumes individuals make rational decisions to maximize personal utility. It addresses Shiller's critique of efficient-market theorists, emphasizing that market unpredictability doesn't necessarily imply inefficiency, but rather reflects the fallibility of human forecasts. The assignment also provides a nuanced explanation of the efficient market hypothesis (EMH), noting that it doesn't require investors to be rational, but rather that market participants act arbitrarily and uniformly. Desklib provides a platform for students to access similar solved assignments and study resources.

Running head: Economics 1
Economics
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Economics 2
Economics
How are the two views of markets, behavioral and rationalist, opposed? How are they
compatible?
Over the past years, the neoclassical view of human behavior in a market is now being
progressively substituted by a different viewpoint normally called behavioral economics.
Behavioral economics collects insights from numerous disciplines such as anthropology,
neuroscience, economics, biology, psychology, and sociology to establish and forecast the way
people in reality make their economic decisions. Instead of just citing some assumptions,
behavioral economics put theoretical statements into tests by use of experiments and other
practical verifications. Studies in this particular field have been confirmed important in
explaining behaviors which might seem to be illogical, and why individuals normally appear to
act against their own self-interest. Rational behavior, on the other hand, is the chief supposition
of Rational Choice Theory (RCT). According to rationalist arguers, people often come up with
sensible and rational decisions which offer them the uppermost amount of personal utility. Such
decisions give individuals the maximum satisfaction or benefit– given the available choices– and
are as well in their highest self-interest. However, whether people adopt behavioral or rationalists
comportments, they all make decisions eyeing the most lucrative investments. They make
decisions which will guarantee them splendid returns in their ventures (Shiller, 2013).
What does Shiller mean when he says efficient-market theorists make a huge mistake: Just
because markets are unpredictable doesn’t mean they are efficient? Explain.
People’s brains are great at what they do since they come up with well-informed presumptions.
That, however, leaves them prone to decision-making errors. Nowhere is this attribute more
distinct than when people attempt to predict the future. Investors in a financial market make their

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predictions based on past experiences and as Sornette, (2017) says past performance at a given
point in time is not a sign of future success. This implies that if people make wrong forecasts that
does not translate or be a proof that the market is inefficient. It simply means their predictions
were wrong or ineffective. Even the most experienced investing gurus make wrong predictions
and therefore it is wrong to conclude that their forecasts failed due to market inefficiency.

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References
Sornette, D. (2017). Why stock markets crash: critical events in complex financial systems (Vol.
49). Princeton University Press.
Shiller, R. (2013). Speculative Asset Prices. Prize Lecture.

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Can you offer a more nuanced explanation of the efficient markets hypothesis than either
of the extreme views, that markets are absolutely efficient or that market participants are
predictably irrational?
Efficient Market Hypothesis (abbreviated as EMH) fundamentally points out that all freely
available information concerning investment securities is readily put into consideration while
pricing the securities. As a result, assuming this is factual; no amount of financial analysis can
provide a speculator with a benefit over other investors, together called "the market."
Efficient Market Hypothesis does not require investors to be rational. EMH rather requires that
speculators shall act arbitrarily, but with uniformity, the market is at all times "right." In other
words, "efficient" in financial markets means "normal." For instance, an extraordinary response
to extraordinary information is normal. If a crowd of people abruptly starts running in a certain
direction, it is normal for you to run towards that direction as well, though there are no any lucid
reasons for doing that. There are different forms of Efficient Market Hypothesis, namely: Weak
Form EMH, Semi-Strong Form EMH, and Strong Form EMH.