Aggregation of Diverse Information with Double Auction Trading among Minimally-Intelligent Algorithmic Agents

Karim Jamal, Michael Maier and Shyam Sunder
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Karim Jamal: University of Alberta
Michael Maier: University of Alberta

No 2182, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Information dissemination and aggregation are key economic functions of financial markets. How intelligent do traders have to be for the complex task of aggregating diverse information (i.e., approximate the predictions of the rational expectations equilibrium) in a competitive double auction market" An apparent ex-ante answer is: intelligent enough to perform the bootstrap operation necessary for the task'to somehow arrive at prices that are needed to generate those very prices. Constructing a path to such equilibrium through rational behavior has remained beyond what we know of human cognitive abilities. Yet, laboratory experiments report that profit motivated human traders are able to aggregate information in some, but not all, market environments (Plott and Sunder 1988, Forsythe and Lundholm 1990). Algorithmic agents have the potential to yield insights into how simple individual behavior may perform this complex market function as an emergent phenomenon. We report on a computational experiment with markets populated by algorithmic traders who follow cognitively simple heuristics humans are known to use. These markets, too, converge to rational expectations equilibria in environments in which human markets converge, albeit slowly and noisily. The results suggest that high level of individual intelligence or rationality is not necessary for efficient outcomes to emerge at the market level; the structure of the market itself is a source of rationality observed in the outcomes.

Keywords: Algorithmic traders; Rational expectations; Structural rationality; Means-end heuristic; 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)
Pages: 43 pages
Date: 2019-06
New Economics Papers: this item is included in nep-cmp and nep-exp
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