Friday, May 4, 2012

The assumption of rationality........

"This is the dreaded winner's curse.  In an auction with many bidders, the winning bidder is often a loser."

"These statements about the winner's curse suggest that bidders make systematic errors.  Economic theory precludes such errors.  Therefore, the statements must be wrong."  The logic of this position is questionable.  It is important to remember that rationality is an assumption in economics, not a demonstrated fact.

-Richard H. Thaler, as excerpted from The Winner's Curse: Paradoxes and Anomalies of Economic Life

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