Computational Complexity and Asset Pricing
47 Pages Posted: 29 Oct 2019 Last revised: 8 Apr 2020
Date Written: April 7, 2020
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 find 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: Suggested Citation