Can Intelligence Help Improve Market Performance?
AbstractThe issue regarding the influence of intelligence on market efficiency has been discussed for a long time. Gode and Sunder (1993) mentioned that the aggregate behavior of zero-intelligence traders is able to generate an efficient market. They introduced two types of markets composed of zero-intelligence traders: one that imposes a budget constraint on traders and the other that does not. They found that the inclusion of a budget constraint was enough for the market to induce allocative efficiency. Therefore, learning, intelligence, and profit motivation are not necessary. However, Cliff and Bruten (1997) demonstrated that zero intelligence is not enough and that traders with remarkably simple adaptive mechanisms (zero-intelligence-plus traders) could perform very similarly to groups of human traders. On the other hand, Chen, Tai, and Chie (2002) reached a different conclusion. In their computer simulations, smartness did not enhance market performance. In fact, the experiment with smarter traders resulted in less stable price dynamics and lower allocative efficiency. In this paper, based on the framework of artificial stock market with many heterogeneous agents, the way of modeling the intelligence is proposed to study the influence of intelligence on market performance. This modeling together with the characteristics of adaptive learning make our results more convincible.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 106.
Date of creation: 11 Aug 2004
Date of revision:
Artificial Stock Market; Double Auction; Bid-Ask Spread; Agent-Based Modeling; Boolean Functions; Genetic Programming; Strongly Typed Genetic Programming;
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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