Rational decisions not always made in markets from "summary" of The General Theory of Employment, Interest, and Money by John Maynard Keynes
The assumption that all agents in the market make rational decisions is a fundamental pillar of classical economic theory. According to this view, individuals possess perfect information, weigh all available options, and make choices that maximize their utility. However, this idealized notion does not always hold true in the real world. In reality, human behavior is often influenced by emotions, psychological biases, and incomplete information. As a result, individuals may not always make decisions that are in their best interest from a purely rational standpoint. This can lead to market outcomes that deviate from the predictions of traditional economic models. For example, during times of uncertainty or financial distress, individuals may resort to herd behavior, following the actions of others rather than making independent, rational choices. This can result in market bubbles, panics, and other phenomena that are difficult to explain using standard economic reasoning. Moreover, the presence of asymmetric information can further complicate the decision-making process in markets. If certain agents possess more information than others, they may be able to manipulate prices or outcomes to their advantage, leading to inefficient allocations of resources. In light of these complexities, it becomes clear that the assumption of rational decision-making in markets is an oversimplification of reality. While economic theory provides a useful framework for understanding human behavior, it is important to recognize that individuals do not always act in a purely rational manner. By acknowledging the limitations of rationality in decision-making, we can gain a more nuanced understanding of market dynamics and develop more effective policies to address economic challenges. In doing so, we can move towards a more realistic and comprehensive approach to economic analysis that takes into account the complexities of human behavior.
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