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Although many experiments suggest that individuals behave irrationally and that the basic axioms of economics concerning rationality do not hold, many economists argue that while the basic axioms may not hold for individuals they are still valid for the market as a whole. This is to say that although some of the individuals at the market may be irrational, market would behave as if the individuals were rational (e.g. see Becker 1962) A recent study by John A. List (University of Maryland and NBER) and Daniel L. Millimet (Southern Methodist University) suggest that economists may be right. Their experiment suggests that markets could filter irrational behaviour and that “even when markets are populated solely by irrational buyers, aggregate market outcomes quickly converge to neoclassical predictions.” (List and Millimet 2004)
References:
Becker, G.S. (1962) “Irrational Behavior and Economic Theory,” Journal of Political Economy,
70: 1-13.
List, J. A. and Millimet, D.L. (2004) The Market: Catalyst for Rationality and Filter of Irrationality, ftp://ftp1.economics.smu.edu/WorkingPapers/2005/millimet/rats.pdf
“The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 2005 goes to Robert J. Aumann and Thomas C. Schelling “for having enhanced our understanding of conflict and cooperation through game-theory analysis”. The Prize Lectures in Economics 2005 will be held on December 8 in Aula Magna, Stockholm University.” Nobelprize.org
