Simple Agents, Intelligent Markets

Abstract

Attainment of rational expectations equilibria in asset markets calls for the price system to disseminate agents’ private information to others. Markets populated by human agents are known to be capable of converging to rational expectations equilibria. This paper reports comparable market outcomes when human agents 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 point to market structure (rather than cognition or optimization) being an important determinant of efficient aggregate level outcomes.

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, G14