Is individual rationality essential to market price formation? The contribution of zero-intelligence agent trading models

Paola Tubaro

Journal of Economic Methodology, 2009, vol. 16, issue 1, 1-19

Abstract: The paper investigates the minimum level of individual rationality that is needed for market prices to converge toward their equilibrium level. It does so by examining the theoretical and methodological foundations of the 'zero-intelligence' (ZI) agent trading approach, with which Gode and Sunder (1993a) claimed that weak individual rationality requirements suffice to obtain equilibrium prices. The paper shows that ZI agents are endowed with a higher degree of rationality than previously believed. Though not maximizing utility, they exhibit utility-improving behavior, and their decision-making rules fulfill important predictions of the theory of choice based on maximization, namely downward-sloping individual demand and upward-sloping individual supply. Additional cognitive skills would be required, were some simplifying assumptions of the basic model removed. Gode and Sunder's analysis supports a non-neoclassical rational choice theory, in which optimization can be replaced by a variety of behavioral rules, while still preserving important results on the functioning of markets.

Keywords: price formation; zero-intelligence agents; Marshallian dynamics; rationality assumptions; utility maximization; experimental markets; partial equilibrium (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/13501780802225528

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