Behavioural economists have uncovered much evidence that market participants do not act like conventional economists would predict “rational individuals” to act. But, instead of jettisoning the bogus standard of rationality underlying those predictions, behavioral economists have clung to it...The behavioural view suggests that swings in asset prices serve no useful social function. If the state could somehow eliminate them through a large intervention, or ban irrational players by imposing strong regulatory measures, the “rational” players could reassert their control and markets would return to their normal state of setting prices at their “true” values.This is implausible, because an exact model of rational decision-making is beyond the capacity of economists - or anyone else - to formulate.
...sometimes price swings become excessive, as recent experience painfully shows. Even accepting that officials must cope with ever-imperfect knowledge, they can implement measures - such as guidance ranges for asset prices and changes in capital and margin requirements that depend on whether these prices are too high or too low - to dampen excessive swings.
Gilles Saint-Paul writes:"...any macroeconomic theory that, in the midst of the housing bubble, would have predicted a financial crisis two years ahead with certainty would have triggered, by virtue of speculation, an immediate stock market crash and a spiral of de-leveraging and de-intermediation which would have depressed investment and consumption. In other words, the crisis would have happened immediately, not in two years, thus invalidating the theory."David K. Levine writes:"Do you believe that it could be widely believed that the stock market will drop by 10% next week? If I believed that I'd sell like mad, and I expect that you would as well. Of course as we all sold and the price dropped, everyone else would ask around and when they started to believe the stock market will drop by 10% next week - why it would drop by 10% right now."[and Arnold says]...if policymakers saw a crisis coming, then they would take steps to stop it, so that it would not happen. Thus, any crisis that does occur has to be one that was not forecast.