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Markets as Artifacts: Aggregate Efficiency from Zero-Intelligence Traders

  • Shyam Sunder
  • MODELS A

The possibility of building a mathematical theory of a system or of simulating that system does not depend on having an adequate microtheory of the natural laws that govern the system components. Such a microtheory might indeed be simply irrelevant. Herbert A. Simon, The Sciences of the Artificial, p. 19. Three phenomena - the disparity between the assumed and observed attributes of economic man, the link between nature and artifacts, and the use of computers as a source of knowledge - fascinated Herbert A. Simon. He built a new paradigm for each field-bounded rationality to deal with the disparity, the science of the artificial as its link to nature, and artificial intelligence for creation of knowledge. In this paper we show that the sciences of the artificial and computer intelligence also hold the key to an understanding of the disparity between individual behavior and market outcomes. When seen as human artifacts, a science of markets need not be built from the science of individual behavior. We outline how, in the nineties, computer simulations enabled us to discover that allocative efficiency - a key characteristic market outcomes - is largely independent of variations in individual behavior under classical conditions. The Sciences of the Artificial suggests such independence and points to its benefits: This skyhook-skyscraper construction of science from the roof down to the yet unconstructed foundations was possible because the behavior of the system at each level depended on only a very approximate, simplified, abstracted characterization of the system at the level next beneath. This is lucky, else the safety of bridges and airplanes might depend on the correctness of the "Eightfold Way" of looking at elementary particles (Simon 1996, p. 16).

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm284.

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Date of creation: 01 May 2002
Date of revision: 01 Sep 2004
Handle: RePEc:ysm:somwrk:ysm284
Contact details of provider: Web page: http://icf.som.yale.edu/

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  1. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, vol. 69(4), pages 493-513, September.
  2. Shyam NMI Sunder & Karim Jamal, 2001. "Why do Biased Heuristics Approximate Bayes Rule in Double Auctions?," Yale School of Management Working Papers ysm197, Yale School of Management.
  3. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
  4. Plott, Charles R & Smith, Vernon L, 1978. "An Experimental Examination of Two Exchange Institutions," Review of Economic Studies, Wiley Blackwell, vol. 45(1), pages 133-53, February.
  5. 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.
  6. Dhananjay (Dan) K. Gode & Shyam Sunder, 2000. "Double Auction Dynamics: Structural Effects Of Non-Binding Price Controls," Yale School of Management Working Papers ysm1, Yale School of Management.
  7. 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.
  8. Plott, Charles R, 1982. "Industrial Organization Theory and Experimental Economics," Journal of Economic Literature, American Economic Association, vol. 20(4), pages 1485-1527, December.
  9. Smith, Vernon L, 1991. "Rational Choice: The Contrast between Economics and Psychology," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 877-97, August.
  10. Bosch, A. & Sunder, S., 1994. "Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium," GSIA Working Papers 1994-11, Carnegie Mellon University, Tepper School of Business.
  11. Gode, Dhananjay K & Sunder, Shyam, 1997. "What Makes Markets Allocationally Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 603-30, May.
  12. Herbert A. Simon, 1996. "The Sciences of the Artificial, 3rd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691914, June.
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