Wouldn't a market always act rationally, by definition?
This is why Ethiopian farmers sell their coffee beans for pennies/kilo, while Starbucks charges $5/gram (made up numbers).
* They don't know that their beans can actually sell for so much
* They don't know how to sell their beans for higher prices (e.g. they don't have access to the right middlemen)
* They aren't coordinated enough and undercut each other when dealing with the middlemen.
* Starbuck's premium prices may have little to do with the beans themselves
* They haven't shipped them across the ocean
* They don't have warehouses to store them in
* They don't have a retail store to sell them in
* Nobody knows the quality or consistency of Ethiopian Joe's coffeebeans, but they know that Starbucks is consistent good.
A better example of irrational acting is that: MLB tickets can be sold for hundreds of dollars, even though professional baseball is the most boring thing to watch, we barely have good enough eyes to see what's happening from that far away anyway, and you'll have to pay 2x for anything you eat or drink.
Also Beanie Babies. Buying beanie babies and tulip bulbs was really irrational acting.
* market: system for trading assets between willing participants
* economics: modeling the behavior of markets assuming rational behavior of participants
The definition of markets has nothing to do with rationality.
Rational: subject acts according to their own utility function
Freely acting is equivalent to rationally acting, which is precisely where markets can exist.
E: Downmod without leaving a comment. Classic HN.
Freely acting != rational acting. People often take actions on bad information, or on bad analysis of good information.
But there must be some universal optimial for a given utility function, right? Like: choosing to buy a BMW when your utility function is a looking for a cheap car is just simply irrational or a mistake.
Here's a good one: All of my high school teachers (and my parents) encouraged me to study biochemistry in college. They assured me there'd be a good career for me afterwards. But they were kinda wrong, and I had executed my utility function (what's a major that will give me interesting and good work) on bad input. I acted rationally, but would you say that my decision was a rational one?
To say whether something was a rational decision requires evaluating the subject's utility function at the time of the decision. This is something only the subject can do. Trying to judge something after the fact is very difficult.
What good input could you have used when you made the decision (or while you continued to execute it)?
Making mistakes in reasoning and/or lacking information that would allow for making a decision at a higher perceived utility does not make one irrational.
An irrational decision is one where an action determined to have the most utility is not taken.