Why is rationality important to the stock market?

Answer 1

Rationality is not a prerequisite for the existence or functioning of the stock market. Its only needed to predict the performance of the market and individual stocks using the conventional economic theories.

Note that the ability to predict using these theories is not needed for the markets to work. Markets functioned even before theories like Black-Scholes were discovered. Having these theories help close the arbitrage gaps more quickly. Thus the markets will become a little bit more efficient. Thats all....

Answer 2

It's not. In fact, there are numerous studies that challenge the assumption of rationality...