The invisible hand and the rational agent are behind bubbles and crashes
Chaos, Solitons and Fractals
209 - 217 p.
Invisible hand, Rational agent, Bubbles, Crashes, Sociophysics, Choice dynamics
The 2000 dot-com crash and the 2008 subprime crisis have fueled the belief that the two classical paradigms of economics, the invisible hand and the rational agent, are not well appropriate to describe market dynamics and should be abandoned at the benefit of alter- native new theoretical concepts. At odd with such a view, using a simple model of choice dynamics from sociophysics, the invisible hand and the rational agent paradigms are given a new legitimacy. Indeed, it is sufficient to introduce the holding of a few intermediate mini market aggregations by agents sharing their own private information, to recenter the invisible hand and the rational agent at the heart of market self regulation. An elasticity is discovered in the market efficiency mechanism due to the existence of an agent collective anticipation. This elasticity is shown to create spontaneous bubbles, which are rationally founded. At the same time, crashes occur at once when the limit of elasticity is reached. Plasticity can also be achieved through a combination of a crash with a sudden shift of the collective anticipation. Although the findings disclose a path to put an end to the bubble- crash phenomena, it is argued to be rationally not feasible. Bubbles and crashes are thus an intrinsic internal part of classical economics.