Emergence of information aggregation to rational expectations equilibria in markets populated by biased heuristic traders

Karim Jamal, Michael Maier and Shyam Sunder

Journal of Economic Behavior & Organization, 2024, vol. 228, issue C

Abstract: Information aggregation is a key economic function of markets. We report results of a computational experiment with markets populated by simple algorithmic traders who follow two heuristics usually thought of as leading to biased information processing in behavioral economics literature (anchor-and-adjust, and representativeness). Outcomes of these markets either tend to cluster around (or fail to do so) rational expectations equilibria under specific conditions, consistent with markets populated by profit-motivated human traders. Algorithmic trader convergence is slower and noisier than that of human traders. Our results illustrate the emergence of rational expectations equilibria through complex interactions among actions of biased heuristic traders with limited information processing capabilities.

Keywords: Anchor-and-adjust; Algorithmic traders; Representativeness heuristic; Rational expectations; Information aggregation; Zero-intelligence agents (search for similar items in EconPapers)
JEL-codes: C92 D44 D50 D70 D82 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:228:y:2024:i:c:s0167268124003068

DOI: 10.1016/j.jebo.2024.106700

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