China Social Science Review

No.2, 2022

 

From Individual Rationality to Market Rationality: A Study of Market Theory from the Perspective of Experimental Economics

(Abstract)

 

Na Yi and He Jingtong

 

Although experimentation is widely regarded as an economic research method, experimental economics has distinctive theoretical attributes. In particular, with regard to the major theoretical issue of how the market allocates resources, it challenges the dominant Western neoclassical market theory on the basis of the findings of a series of market experiments. It shows that even without individual rationality, large-scale transactions, and complete information conditions, a small group of real-world traders, armed only with decentralized private information and limited cognition, can, through repeated interactions and learnings under appropriate market trading rules, eventually converge on a competitive equilibrium that allocates resources efficiently. Thus the market does not depend on the individual rationality of traders to achieve competitive equilibrium, but on the “wisdom of the crowd,” i.e., market rationality.