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

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  • Paola Tubaro

Abstract

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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    1. Wagner, Alfred, 1891. "Marshall's Principles of Economics," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 5, pages 319-338.
    2. J. Doyne Farmer & Paolo Patelli & Ilija I. Zovko, 2003. "The Predictive Power of Zero Intelligence in Financial Markets," Papers cond-mat/0309233, arXiv.org, revised Feb 2004.
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    Cited by:

    1. Paola Tubaro, 2011. "Computational Economics," Chapters, in: John B. Davis & D. Wade Hands (ed.), The Elgar Companion to Recent Economic Methodology, chapter 10, Edward Elgar Publishing.
    2. 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.
    3. Brewer, Paul & Ratan, Anmol, 2019. "Profitability, efficiency, and inequality in double auction markets with snipers," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 486-499.
    4. 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.

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