A new paper by Bar-Gill (not Bar-GRill …) looks at whether the tendency of buyers to make irrational (emotion-based) choices works against the economic system as a whole:
Do the benefits of competition extend to a world with imperfectly rational consumers? I argue that sellers, operating in a competitive market, will design their products, contracts and pricing schemes in response to consumer misconception, resulting in both efficiency losses and harm to consumers. Under certain conditions, competition provides incentives for sellers to educate consumers and reduce misconception, but these mistake-correction forces are limited. The existence of biased demand, generated by imperfectly rational consumers, creates a market failure – a behavioral market failure. Mandated disclosure, deliberately designed for imperfectly rational consumers, or for sophisticated intermediaries that advise imperfectly rational consumers, can help.
The euphemism “imperfectly rational consumer” means stupid buyer. We’re all that. We make moronic decisions based on false information. Often we go out of our ways NOT to pay attention to the signs before us because facing the truth feels bad and uncomfortable.
I’m all for higher and higher levels of disclosure and transparency. I think that is a key element of a well-run free market system. But, we can’t pretend that will solve the problem (I don’t think the author claims it will).
Again, my fundamental theory of everything is that Humans are Dumb. More transparency will help, but you can’t eliminate stupidity.