Does the Market Self-Correct? Asymmetrical Adjustment and the Structure of Economic Error

13 Pages Posted: 12 Dec 2005 Last revised: 25 Oct 2010

Peter T. Leeson

George Mason University - Department of Economics

Christopher J. Coyne

George Mason University - Department of Economics

Peter J. Boettke

George Mason University - Department of Economics

Date Written: 2006

Abstract

While both errors of overoptimism and errors of overpessimism are possible in the face of imperfect information, the presence of option value from deferring a decision to exchange causes trader errors to be overpessimistically biased. This is problematic because unlike errors of overoptimism, errors of overpessimism are not 'automatically' revealed to the agents who make them. Furthermore, owing to the 'bad news principle of irreversible investment', these errors are likely to persist. We show how entrepreneurial activity corrects such errors and prevents their persistence, creating a tendency towards market efficiency despite the presence of imperfect information.

Keywords: Imperfect information, equilibration, entrepreneurship

JEL Classification: B53, D83, L26

Suggested Citation

Leeson, Peter T. and Coyne, Christopher J. and Boettke, Peter J., Does the Market Self-Correct? Asymmetrical Adjustment and the Structure of Economic Error (2006). Review of Political Economy, Vol 18, No. 1, pp. 79-90, January 2006. Available at SSRN: https://ssrn.com/abstract=869114

Peter T. Leeson (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

HOME PAGE: http://www.peterleeson.com

Christopher J. Coyne

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

Peter J. Boettke

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-1149 (Phone)
703-993-1133 (Fax)

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