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Is individual rationality essential to market price formation? The contribution of zero-intelligence agent trading models


  • Paola Tubaro


The paper investigates the minimum level of individual rationality that is needed for market prices to converge toward their equilibrium level. It does so by examining the theoretical and methodological foundations of the 'zero-intelligence' (ZI) agent trading approach, with which Gode and Sunder (1993a) claimed that weak individual rationality requirements suffice to obtain equilibrium prices. The paper shows that ZI agents are endowed with a higher degree of rationality than previously believed. Though not maximizing utility, they exhibit utility-improving behavior, and their decision-making rules fulfill important predictions of the theory of choice based on maximization, namely downward-sloping individual demand and upward-sloping individual supply. Additional cognitive skills would be required, were some simplifying assumptions of the basic model removed. Gode and Sunder's analysis supports a non-neoclassical rational choice theory, in which optimization can be replaced by a variety of behavioral rules, while still preserving important results on the functioning of markets.

Suggested Citation

  • Paola Tubaro, 2009. "Is individual rationality essential to market price formation? The contribution of zero-intelligence agent trading models," Journal of Economic Methodology, Taylor & Francis Journals, vol. 16(1), pages 1-19.
  • Handle: RePEc:taf:jecmet:v:16:y:2009:i:1:p:1-19 DOI: 10.1080/13501780802225528

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    References listed on IDEAS

    1. Richard Arena, 2012. "Economic rationality and the emergence of institutions: a Schumpeterian view," Post-Print halshs-00941347, HAL.
    2. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211-211.
    3. Shionoya,Yuichi, 1997. "Schumpeter and the Idea of Social Science," Cambridge Books, Cambridge University Press, number 9780521430340, March.
    4. Enrico Santarelli & Enzo Pesciarelli, 1990. "The Emergence of a Vision: The Development of Schumpeter's Theory of Entrepreneurship," History of Political Economy, Duke University Press, vol. 22(4), pages 677-696, Winter.
    5. H. Peyton Young, 1996. "The Economics of Convention," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 105-122, Spring.
    6. Powell, Walter W, 1996. "Weber and Schumpeter: Turbulent Lives, Ideas Never at Rest," Industrial and Corporate Change, Oxford University Press, vol. 5(3), pages 917-924.
    7. Richard Arena & Agnès Festré, 2006. "Knowledge and Beliefs in Economics: The Case of the Austrian Tradition," Chapters,in: Knowledge, Beliefs and Economics, chapter 3 Edward Elgar Publishing.
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    Cited by:

    1. Paola Tubaro, 2011. "Computational Economics," Chapters,in: The Elgar Companion to Recent Economic Methodology, chapter 10 Edward Elgar Publishing.
    2. Moscati, Ivan & Tubaro, Paola, 2009. "Random behavior and the as-if defense of rational choice theory in demand experiments," LSE Research Online Documents on Economics 27001, London School of Economics and Political Science, LSE Library.
    3. Giuseppe Attanasi & Samuele Centorrino & Ivan Moscati, 2011. "Double Auction Equilibrium and Efficiency in a Classroom Experimental Search Market," LERNA Working Papers 11.03.337, LERNA, University of Toulouse.


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