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Why do Biased Heuristics Approximate Bayes Rule in Double Auctions?

Shyam Sunder
Yale School of Management

Karim Jamal
University of Alberta - Department of Accounting & Management Information Systems

August 2000

Yale SOM Working Paper No. ES-12

Abstract:
Jamal and Sunder (1996) showed that the median prices in double auctions populated by zero-intelligence (ZI) traders whose trading limits are set by two biased heuristics tend to converge to the same equilibrium as if their trading limits were set by applying Bayes' Rule. This note provides an analytical explanation of why the repeated use of biased heuristics approximates Bayes rule.

Keywords: Aggregate Market Rationality, Bayesian Equilibrium, Double Auction, Biased Heuristics

JEL Classifications: A12, C11, D44, D81

Working Paper Series

Date posted: June 07, 2001 ; Last revised: May 10, 2002

Suggested Citation

Sunder, Shyam and Jamal, Karim, Why do Biased Heuristics Approximate Bayes Rule in Double Auctions? (August 2000). Yale SOM Working Paper No. ES-12. Available at SSRN: http://ssrn.com/abstract=272450 or doi:10.2139/ssrn.272450

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Contact Information

Shyam Sunder (Contact Author) Yale School of Management ( email ) 135 Prospect Street P.O. Box 208200 New Haven, CT 06520-8200 United States 203-432-6160 (Phone) 203-432-6974 (Fax) HOME PAGE: http://www.som.yale.edu/faculty/sunder/
Karim Jamal University of Alberta - Department of Accounting & Management Information Systems ( email ) Edmonton, Alberta T6G 2R6 Canada 780-492-5829 (Phone) 780-492-3325 (Fax)

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