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Decoupling Markets and Individuals: Rational Expectations Equilibrium Outcomes from Information Dissemination among Boundedly-Rational Traders

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  • Karim Jamal

    (University of Alberta)

  • Michael Maier

    (University of Alberta)

  • Shyam Sunder

    ()
    (School of Management, Yale University)

Abstract

Attainment of rational expectations equilibria in asset markets calls for the price system to disseminate traders’ private information to others. It is known that markets populated by asymmetrically-informed profit-motivated human traders can converge to rational expectations equilibria. This paper reports comparable market outcomes when human traders are replaced by boundedly-rational algorithmic agents who use a simple means-end heuristic. These algorithmic agents lack the capability to optimize; yet outcomes of markets populated by them converge near the equilibrium derived from optimization assumptions. These findings suggest that market structure is an important determinant of efficient aggregate level outcomes, and that care is necessary not to overstate the importance of human cognition and conscious optimization in such contexts.

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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1868.

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Length: 30 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:cwl:cwldpp:1868

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Related research

Keywords: Bounded rationality; Dissemination of asymmetric information; Efficiency of security markets; Minimally-rational agents; Rational expectations; Structural properties of markets;

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  1. 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.
  2. Shyam Sunder, 2006. "Determinants of Economic Interaction: Behavior or Structure," Journal of Economic Interaction and Coordination, Springer, vol. 1(1), pages 21-32, May.
  3. Huber, Juergen & Shubik, Martin & Sunder, Shyam, 2007. "Three Minimal Market Institutions: Theory and Experimental Evidence," Working Papers 27, Yale University, Department of Economics.
  4. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 463, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. Martin Angerer & Juergen Huber & Martin Shubik & Shyam Sunder, 2010. "An economy with personal currency: theory and experimental evidence," Annals of Finance, Springer, vol. 6(4), pages 475-509, October.
  6. Jamal, Karim & Sunder, Shyam, 1996. "Bayesian equilibrium in double auctions populated by biased heuristic traders," Journal of Economic Behavior & Organization, Elsevier, vol. 31(2), pages 273-291, November.
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