Markets as Artifacts: Aggregate Efficiency from Zero-Intelligence Traders

Posted: 28 Sep 2004

See all articles by Shyam Sunder

Shyam Sunder

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

Multiple version iconThere are 2 versions of this paper

Date Written: 2004

Abstract

The possibility of building a mathematical theory of a system or of simulating that system does not depend on having an adequate microtheory of the natural laws that govern the system components. Such a microtheory might indeed be simply irrelevant. Herbert A. Simon, The Sciences of the Artificial, p. 19.

Three phenomena - the disparity between the assumed and observed attributes of economic man, the link between nature and artifacts, and the use of computers as a source of knowledge - fascinated Herbert A. Simon. He built a new paradigm for each field-bounded rationality to deal with the disparity, the science of the artificial as its link to nature, and artificial intelligence for creation of knowledge. In this paper we show that the sciences of the artificial and computer intelligence also hold the key to an understanding of the disparity between individual behavior and market outcomes. When seen as human artifacts, a science of markets need not be built from the science of individual behavior. We outline how, in the nineties, computer simulations enabled us to discover that allocative efficiency - a key characteristic market outcomes - is largely independent of variations in individual behavior under classical conditions. The Sciences of the Artificial suggests such independence and points to its benefits: This skyhook-skyscraper construction of science from the roof down to the yet unconstructed foundations was possible because the behavior of the system at each level depended on only a very approximate, simplified, abstracted characterization of the system at the level next beneath. This is lucky, else the safety of bridges and airplanes might depend on the correctness of the "Eightfold Way" of looking at elementary particles (Simon 1996, p. 16).

Keywords: efficiency of markets, zero intelligence, decision making, bounded rationality, minimal rationality economics

JEL Classification: A12, B25, C9, D44, D81

Suggested Citation

Sunder, Shyam, Markets as Artifacts: Aggregate Efficiency from Zero-Intelligence Traders (2004). MODELS OF A MAN, ESSAYS IN MEMORY OF HERBERT A. SIMON, Mie Augier, James G. March, eds., MIT Press, 2004. Available at SSRN: https://ssrn.com/abstract=594623

Shyam Sunder (Contact Author)

Yale University - School of Management ( email )

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P.O. Box 208200
New Haven, CT 06520-8200
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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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