The Internet Made The Housing Market Less Rational

Abstract

The Internet Made The Housing Market Less Rational Rational expectations is a basic economic theory that originated with a paper written in 1972 by future Nobel Prize-winning economist Robert Lucas. A key element of both rational expectations and behavioral economics is "Information" and how the market reacts to it. Does the market analyze all available information efficiently, or is the market prone to misinterpret information which can lead to irrational booms and busts? Information Explosion Back to earth, in the case of the housing market, I got a front-row seat to the real estate boom and bust in the 2000s in one of the bubbliest markets, Phoenix, Arizona. The amount of information we had about the housing market back then was a tiny fraction of the information we have today. Did all the information we've had in recent years about the real estate market make the market more rational like I thought it would? No. Prices boomed faster this time around. Information Changes Markets In 2005, I thought people and markets were inherently rational and if we just had more information about what was really happening in the market, the market would act more rationally, more predictably, without all the wild booms and busts. Today, I'm thinking that markets are about as rational and irrational as people in general.