The quandary
Individual traders
- exhibit substantial judgement biases
- make apparently irrational “mistakes”
Normalized market prices
- behave “as predicted” by theory
How can this be?
- IEM evidence suggests
- “Marginal” traders are more rational
- Market makers are more rational
- Laboratory evidence suggests
- Wishful thinking will affect prices when unbalanced
- Wishful thinking may leave relative prices unaffected