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On the Behavioral Foundations of the Law of Supply and Demand: Human Convergence and Robot Randomness

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Author Info
Paul Brewer ()
Maria Huang
Brad Nelson
Charles Plott ()
Abstract

This research builds on the work of D.K. Gode and Shyam Sunder who demonstrated the existence of a strong relationship between market institutions and the ability of markets to seek equilibrium—even when the agents themselves have limited intelligence and behave with substantial randomness. The question posed is whether or not market institutions account for the operation of the law of supply and demand in markets populated by humans with no role required of human rationality. Are institutions responsible for the operations of the law of supply and demand or are behavioral principles also at work? Experiments with humans and simulations with robots both conducted in conditions in which major institutional and structural aids to convergence were removed, produced clear answers. Human markets converge, while robot markets do not. The structural and institutional features certainly facilitate convergence under conditions of substantial irrationality, but they are not necessary for convergence in markets in which agents have the rationality of humans. Copyright Kluwer Academic Publishers 2002

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Publisher Info
Article provided by Springer in its journal Experimental Economics.

Volume (Year): 5 (2002)
Issue (Month): 3 (December)
Pages: 179-208
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Handle: RePEc:kap:expeco:v:5:y:2002:i:3:p:179-208

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Keywords: experiments; rationality; equilibration; robots;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70, pages 322. [Downloadable!] (restricted)
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  3. Sunder, S., 1992. "Lower Bounds for Efficiency of Surplus Extraction in Double Auctions," GSIA Working Papers 1992-17, Carnegie Mellon University, Tepper School of Business.
  4. Rubinstein, Ariel & Wolinsky, Asher, 1985. "Equilibrium in a Market with Sequential Bargaining," Econometrica, Econometric Society, vol. 53(5), pages 1133-50, September. [Downloadable!] (restricted)
  5. Noussair, Charles N & Plott, Charles R & Riezman, Raymond G, 1995. "An Experimental Investigation of the Patterns of International Trade," American Economic Review, American Economic Association, vol. 85(3), pages 462-91, June. [Downloadable!] (restricted)
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  6. Gode, Dhananjay K & Sunder, Shyam, 1997. "What Makes Markets Allocationally Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 603-30, May.
  7. Jamison, Julian C. & Plott, Charles R., 1997. "Costly offers and the equilibration properties of the multiple unit double auction under conditions of unpredictable shifts of demand and supply," Journal of Economic Behavior & Organization, Elsevier, vol. 32(4), pages 591-612, April. [Downloadable!] (restricted)
  8. Steven Gjerstad & Jason Shachat, 1996. "A General Equilibrium Structure for Induced Supply and Demand," University of California at San Diego, Economics Working Paper Series 96-35, Department of Economics, UC San Diego. [Downloadable!]
  9. Dhananjay (Dan) K. Gode & Shyam Sunder, 2000. "Double Auction Dynamics: Structural Effects Of Non-Binding Price Controls," Yale School of Management Working Papers ysm1, Yale School of Management. [Downloadable!]
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  10. Gjerstad, Steven & Dickhaut, John, 1998. "Price Formation in Double Auctions," Games and Economic Behavior, Elsevier, vol. 22(1), pages 1-29, January. [Downloadable!] (restricted)
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  11. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February. [Downloadable!] (restricted)
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  13. Aliprantis, Charalambos D & Plott, Charles R, 1992. "Competitive Equilibria in Overlapping Generations Experiments," Economic Theory, Springer, vol. 2(3), pages 389-426, July.
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  15. Plott, Charles R & Smith, Vernon L, 1978. "An Experimental Examination of Two Exchange Institutions," Review of Economic Studies, Blackwell Publishing, vol. 45(1), pages 133-53, February. [Downloadable!] (restricted)
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  16. Cason, Timothy N. & Friedman, Daniel, 1996. "Price formation in double auction markets," Journal of Economic Dynamics and Control, Elsevier, vol. 20(8), pages 1307-1337, August. [Downloadable!] (restricted)
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  17. Plott, Charles R, 1982. "Industrial Organization Theory and Experimental Economics," Journal of Economic Literature, American Economic Association, vol. 20(4), pages 1485-1527, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marco LiCalzi & Paolo Pellizzari, 2008. "Zero-Intelligence Trading without Resampling," Working Papers 164, Department of Applied Mathematics, University of Venice. [Downloadable!]
  2. Martin Barner & Francesco Feri & Charles R. Plott, 2005. "On the microstructure of price determination and information aggregation with sequential and asymmetric information arrival in an experimental asset market," Annals of Finance, Springer, vol. 1(1), pages 73-107, 01. [Downloadable!] (restricted)
  3. Marco LiCalzi & Lucia Milone & Paolo Pellizzari, 2008. "Allocative efficiency and traders' protection under zero intelligence behavior," Working Papers 168, Department of Applied Mathematics, University of Venice, revised Nov 2009. [Downloadable!]
  4. Alton, Michael R. & Plott, Charles R., 2007. "Principles of continuous price determination in an experimental environment with flows of random arrivals and departures," Working Papers 1276, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  5. John Duffy, 2004. "Agent-Based Models and Human Subject Experiments," Computational Economics 0412001, EconWPA. [Downloadable!]
    Other versions:
  6. Chia-Hsuan Yeh, 2007. "The role of intelligence in time series properties," Computational Economics, Springer, vol. 30(2), pages 95-123, September. [Downloadable!] (restricted)
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