Bayesian Equilibrium in Double Auctions Populated by Biased Heuristic Traders

Journal of Economic Behavior & Organization Volume 31, Issue 2, November 1996, Pages 273–291

University of Alberta School of Business Research Paper No. 2013-1037

Posted: 2 Jul 2013

See all articles by Karim Jamal

Karim Jamal

University of Alberta - Department of Accounting, Operations & Information Systems

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Date Written: June 1, 1995

Abstract

We use computer simulation to examine three asset markets with imperfect information. In processing imperfect information, traders in the three markets are bayesian, empirical bayesian, and heuristic (representativeness and anchor-and-adjust) respectively. All three converge to the same bayesian equilibrium — although the latter two converge more slowly — without profit maximization, natural selection, arbitrage, or mutual cancellation of random actions. The results support Becker (1962) and Simon (1973) in that the rationality of the market emerges as a consequence of the market structure, and not from the rationality of individuals.

Keywords: Aggregate market rationality, Bayesian equilibrium, Double auction, Representativeness heuristic, Zero-intelligence trader

JEL Classification: A12, C11, D44, D81

Suggested Citation

Jamal, Karim and Sunder, Shyam, Bayesian Equilibrium in Double Auctions Populated by Biased Heuristic Traders (June 1, 1995). Journal of Economic Behavior & Organization Volume 31, Issue 2, November 1996, Pages 273–291; University of Alberta School of Business Research Paper No. 2013-1037. Available at SSRN: https://ssrn.com/abstract=2279066

Karim Jamal (Contact Author)

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-5829 (Phone)
780-492-3325 (Fax)

Shyam Sunder

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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