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Don't Let Your Robots Grow Up To Be Traders: Artificial Intelligence, Human Intelligence, and Asset-Market Bubbles

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Author Info
Ross M. Miller (Miller Risk Advisors)

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Abstract

Researchers who have examined markets populated by "robot traders" have claimed that the high level of allocative efficiency observed in experimental markets is driven largely by the "intelligence" implicit in the rules of the market. Furthermore, they view the ability of agents (artificial or human) to process information and make rational decisions as unnecessary for the efficient operation of markets. This paper presents a new series of market experiments that show that markets populated with standard robot traders are no longer efficient if time is a meaningful element, as it is in all asset markets. While simple two- season markets with human subjects reliably converge to an efficient equilibrium, markets with minimally intelligent robot traders fail to attain this equilibrium. Instead, these markets overshoot the equilibrium and then crash below it. In addition to firmly establishing the role of trader intelligence in asset-market equilibrium, these experiments also provide insights into why bubbles and crashes are consistently observed in many asset-market laboratory experiments using human subjects.

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Paper provided by EconWPA in its series Experimental with number 0306001.

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Length: 18 pages
Date of creation: 09 Jun 2003
Date of revision:
Handle: RePEc:wpa:wuwpex:0306001

Note: Type of Document - PDF/Acrobat; prepared on Windows 98SE; to print on PDF compatible; pages: 18 ; figures: Included
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Web page: http://129.3.20.41

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Related research
Keywords: market bubbles; intertemporal competitive equilibrium; experimental markets; trading agents;

Other versions of this item:

Find related papers by JEL classification:
C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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References listed on IDEAS
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. Caginalp, Gunduz & Porter, David & Smith, Vernon, 2000. "Momentum and overreaction in experimental asset markets," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 187-204, January. [Downloadable!] (restricted)
  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)
    Other versions:
  3. Van Boening, Mark V & Wilcox, Nathaniel T, 1996. "Avoidable Cost: Ride a Double Auction Roller Coaster," American Economic Review, American Economic Association, vol. 86(3), pages 461-77, June. [Downloadable!] (restricted)
  4. Porter, David P & Smith, Vernon L, 1995. "Futures Contracting and Dividend Uncertainty in Experimental Asset Markets," Journal of Business, University of Chicago Press, vol. 68(4), pages 509-41, October. [Downloadable!] (restricted)
  5. Miller, Ross M & Plott, Charles R, 1985. "Product Quality Signaling in Experimental Markets," Econometrica, Econometric Society, vol. 53(4), pages 837-72, July. [Downloadable!] (restricted)
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  6. Miller, Ross M & Plott, Charles R & Smith, Vernon L, 1977. "Intertemporal Competitive Equilibrium: An Empirical Study of Speculation," The Quarterly Journal of Economics, MIT Press, vol. 91(4), pages 599-624, November. [Downloadable!] (restricted)
    Other versions:
  7. Ross M. Miller, 2002. "Can Markets Learn to Avoid Bubbles?," Experimental 0201001, EconWPA, revised 07 Jan 2002. [Downloadable!]
  8. Williams, Arlington W, 1980. "Computerized Double-Auction Markets: Some Initial Experimental Results," Journal of Business, University of Chicago Press, vol. 53(3), pages 235-58, July. [Downloadable!] (restricted)
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