Rational Choice in Experimental Markets

The theory of rational behavior has several different uses. First, it is used at the most fundamental level of experimental methodology to induce preferences used as parameters in models. Second, it appears repeatedly in experimentally successful mathematical models of complex phenomena such as speculation, bidding, and signaling. Third, it is used as a tool to generate ex post models of results that are otherwise inexplicable. Finally, it has been used as a tool successfully to design new institutions to solve specific problems. When tested directly, the theory can be rejected. It is retained because neither an alternative theory nor an alternative general principle accomplishes so much.

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