Computational Complexity and Asset Pricing

47 Pages Posted: 29 Oct 2019 Last revised: 8 Apr 2020

See all articles by Peter Bossaerts

Peter Bossaerts

University of Melbourne - Department of Finance

Elizabeth Bowman

University of Melbourne - Department of Finance

Felix Fattinger

University of Melbourne - Department of Finance

Harvey Huang

University of Melbourne

Carsten Murawski

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Anirudh Suthakar

University of Melbourne - Department of Finance

Shireen Tang

University of Melbourne - Department of Finance

Nitin Yadav

University of Melbourne - Department of Finance

Date Written: April 7, 2020

Abstract

We study how markets help spread knowledge about solutions to the standard but computationally hard problem of maximizing value over indivisible goods subject to a budget constraint. In a first experiment, we f ind that complete markets are fairly ineffective. Still, participants use prices and volumes to improve their choices. In a second experiment, inspired by the notion of oracles in computer science, we show that a reduction to only one carefully chosen asset dramatically improves price quality and knowledge dispersion. Our analysis provides a formalization of Hayek's (1945) conjecture that markets help disseminate knowledge in society.

Keywords: Computational Complexity, Financial Markets, Market Design, Dissemination of Knowledge, Oracles

JEL Classification: G13, G14

Suggested Citation

Bossaerts, Peter L. and Bowman, Elizabeth and Fattinger, Felix and Huang, Harvey and Murawski, Carsten and Suthakar, Anirudh and Tang, Shireen and Yadav, Nitin, Computational Complexity and Asset Pricing (April 7, 2020). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3475433 or http://dx.doi.org/10.2139/ssrn.3475433

Peter L. Bossaerts (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Department of Finance
Carlton, Victoria 3010
Australia

HOME PAGE: http://bmmlab.org

Elizabeth Bowman

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Felix Fattinger

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010
Australia

Harvey Huang

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Carsten Murawski

University of Melbourne - Department of Finance ( email )

Brain, Mind & Markets Lab
Parkville, Victoria 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Anirudh Suthakar

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Shireen Tang

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Nitin Yadav

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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