Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality

Dhananjay K Gode and Shyam Sunder

Journal of Political Economy, 1993, vol. 101, issue 1, 119-37

Abstract: This paper reports market experiments in which human traders are replaced by "zero-intelligence" programs that submit random bids and offers. Imposing a budget constraint (i.e., n ot permitting traders to sell below their costs or buy above their valu es) is sufficient to raise the allocative efficiency of these auctions close to 100 percent. Allocative efficiency of a double auction deri ves largely from its structure, independent of traders' motivation, intelligence, or learning. Adam Smith's invisible hand may be more powerful than some may have thought; it can generate aggregate rationality not only from individual rationality but also from individual irrationality. Copyright 1993 by University of Chicago Press.

Date: 1993
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Related works:
Working Paper: Allocative Efficiency of Markets with Zero Intelligence (Z1) Traders: Market as a Partial Substitute for Individual Rationality (1991)
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:v:101:y:1993:i:1:p:119-37

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