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Allocative Efficiency of Markets with Zero Intelligence (Z1) Traders: Market as a Partial Substitute for Individual Rationality

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Listed:
  • Gode, D.K.
  • Sunder, S.

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Gode, D.K. & Sunder, S., 1991. "Allocative Efficiency of Markets with Zero Intelligence (Z1) Traders: Market as a Partial Substitute for Individual Rationality," GSIA Working Papers 1992-16, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:1992-16
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