Why Do Biased Heuristics Approximate Bayes Rule in Double Auctions?
Posted: 13 May 2002 Last revised: 10 Sep 2015
Date Written: 2001
Jamal and Sunder [Journal of Economic Behavior and Organization, 32 (1966) 273] 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, Bayaesian Equilibrium, Double Auction, Biased Heuristics
JEL Classification: A12, C11, D44, D81
Suggested Citation: Suggested Citation