Decoupling Markets and Individuals: Rational Expectations Equilibrium Outcomes from Information Dissemination Among Boundedly-Rational Traders
University of Alberta - Department of Accounting, Operations & Information Systems
Michael S. Maier
University of Alberta - Department of Accounting, Operations and Information Systems
Yale University - School of Management
July 30, 2012
Cowles Foundation Discussion Paper No. 1868
Attainment of rational expectations equilibria in asset markets calls for the price system to disseminate traders’ private information to others. It is known that markets populated by asymmetrically-informed profit-motivated human traders can converge to rational expectations equilibria. This paper reports comparable market outcomes when human traders are replaced by boundedly-rational algorithmic agents who use a simple means - end heuristic. These algorithmic agents lack the capability to optimize; yet outcomes of markets populated by them converge near the equilibrium derived from optimization assumptions. These findings suggest that market structure is an important determinant of efficient aggregate level outcomes, and that care is necessary not to overstate the importance of human cognition and conscious optimization in such contexts.
Number of Pages in PDF File: 31
Keywords: Bounded rationality, Dissemination of asymmetric information, Efficiency of security markets, Minimally-rational agents, Rational expectations, Structural properties of markets
JEL Classification: C92, D44, D50, D70, D82, G14working papers series
Date posted: August 1, 2012 ; Last revised: January 27, 2013
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