Markets as Artifacts: Aggregate Efficiency from Zero-Intelligence Traders

Shyam Sunder and Models A

Yale School of Management Working Papers from Yale School of Management

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 (search for similar items in EconPapers)
Date: 2002-05-01, Revised 2004-09-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://repec.som.yale.edu/icfpub/publications/2441.pdf (application/pdf)

Related works:
Working Paper: Markets as Artifacts: Aggregate Efficiency from Zero-Intelligence Traders (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ysm:wpaper:ysm284

Access Statistics for this paper

More papers in Yale School of Management Working Papers from Yale School of Management Contact information at EDIRC.
Bibliographic data for series maintained by ().