IDEAS home Printed from https://ideas.repec.org/p/ysm/wpaper/ysm284.html
   My bibliography  Save this paper

Markets as Artifacts: Aggregate Efficiency from Zero-Intelligence Traders

Author

Listed:
  • Shyam Sunder
  • MODELS A

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).

Suggested Citation

  • Shyam Sunder & MODELS A, 2002. "Markets as Artifacts: Aggregate Efficiency from Zero-Intelligence Traders," Yale School of Management Working Papers ysm284, Yale School of Management, revised 01 Sep 2004.
    • Handle: RePEc:ysm:wpaper:ysm284
    as

    Download full text from publisher

    File URL: https://repec.som.yale.edu/icfpub/publications/2441.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Sunder, S., 1992. "Lower Bounds for Efficiency of Surplus Extraction in Double Auctions," GSIA Working Papers 1992-17, Carnegie Mellon University, Tepper School of Business.
    2. Gode, Dhananjay (Dan) K. & Sunder, Shyam, 2004. "Double auction dynamics: structural effects of non-binding price controls," Journal of Economic Dynamics and Control, Elsevier, vol. 28(9), pages 1707-1731, July.
    3. Antoni Bosch-Domenech & Shyam Sunder, 2000. "Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium," Computational Economics, Springer;Society for Computational Economics, vol. 16(3), pages 257-284, December.
    4. Robert B. Wilson, 1987. "On Equilibria of Bid-Ask Markets," Palgrave Macmillan Books, in: George R. Feiwel (ed.), Arrow and the Ascent of Modern Economic Theory, chapter 11, pages 375-414, Palgrave Macmillan.
    5. Jamal, Karim & Sunder, Shyam, 1991. "Money vs gaming: Effects of salient monetary payments in double oral auctions," Organizational Behavior and Human Decision Processes, Elsevier, vol. 49(1), pages 151-166, June.
    6. Rothschild, Emma, 1994. "Adam Smith and the Invisible Hand," American Economic Review, American Economic Association, vol. 84(2), pages 319-322, May.
    7. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-137, February.
    8. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-955, December.
    9. Dhananjay K. Gode & Shyam Sunder, 1997. "What Makes Markets Allocationally Efficient?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 603-630.
    10. Jamal, Karim & Sunder, Shyam, 2001. "Why do biased heuristics approximate Bayes rule in double auctions?," Journal of Economic Behavior & Organization, Elsevier, vol. 46(4), pages 431-435, December.
    11. Charles R. Plott & Vernon L. Smith, 1978. "An Experimental Examination of Two Exchange Institutions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(1), pages 133-153.
    12. Dhananjay K. & Shyam Sunder & Stephen Spear, 2004. "Convergence of Double Auctions to Pareto Optimal Allocations in the Edgeworth Box," Yale School of Management Working Papers amz2518, Yale School of Management, revised 01 Apr 2008.
    13. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, vol. 69(4), pages 493-513, September.
    14. Herbert A. Simon, 1996. "The Sciences of the Artificial, 3rd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691914, April.
    15. Plott, Charles R, 1982. "Industrial Organization Theory and Experimental Economics," Journal of Economic Literature, American Economic Association, vol. 20(4), pages 1485-1527, December.
    16. Smith, Vernon L, 1991. "Rational Choice: The Contrast between Economics and Psychology," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 877-897, August.
    17. Jamal, Karim & Sunder, Shyam, 1996. "Bayesian equilibrium in double auctions populated by biased heuristic traders," Journal of Economic Behavior & Organization, Elsevier, vol. 31(2), pages 273-291, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Anush Kapadia, 2017. "The structure of state borrowing: towards a political theory of control mechanisms," Cambridge Journal of Regions, Economy and Society, Cambridge Political Economy Society, vol. 10(1), pages 189-204.
    2. Miller, Ross M., 2008. "Don't let your robots grow up to be traders: Artificial intelligence, human intelligence, and asset-market bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 153-166, October.
    3. Vernon L. Smith, 2003. "Constructivist and Ecological Rationality in Economics," American Economic Review, American Economic Association, vol. 93(3), pages 465-508, June.
    4. Shyam Sunder, 2006. "Determinants of Economic Interaction: Behavior or Structure," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 1(1), pages 21-32, May.
    5. Chen, Shu-Heng, 2012. "Varieties of agents in agent-based computational economics: A historical and an interdisciplinary perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 1-25.
    6. Gode, Dhananjay (Dan) K. & Sunder, Shyam, 2004. "Double auction dynamics: structural effects of non-binding price controls," Journal of Economic Dynamics and Control, Elsevier, vol. 28(9), pages 1707-1731, July.
    7. Mousavi, Shabnam & Sunder, Shyam, 2023. "Physics, Biology and Human Faculties: A Structural Stepwise Approach to Modeling Human Behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 311-321.
    8. Marco LiCalzi & Paolo Pellizzari, 2006. "The Allocative Effectiveness of Market Protocols Under Intelligent Trading," Lecture Notes in Economics and Mathematical Systems, in: Charlotte Bruun (ed.), Advances in Artificial Economics, chapter 2, pages 17-29, Springer.
    9. Basu Sudipta & Waymire Gregory B., 2019. "Historical Cost and Conservatism Are Joint Adaptations That Help Identify Opportunity Cost," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 9(1), pages 1-13, March.
    10. Karim Jamal & Michael Maier & Shyam Sunder, 2019. "Aggregation of Diverse Information with Double Auction Trading among Minimally-Intelligent Algorithmic Agents," Cowles Foundation Discussion Papers 2182, Cowles Foundation for Research in Economics, Yale University.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Paul Brewer & Maria Huang & Brad Nelson & Charles Plott, 2002. "On the Behavioral Foundations of the Law of Supply and Demand: Human Convergence and Robot Randomness," Experimental Economics, Springer;Economic Science Association, vol. 5(3), pages 179-208, December.
    2. Gode, Dhananjay (Dan) K. & Sunder, Shyam, 2004. "Double auction dynamics: structural effects of non-binding price controls," Journal of Economic Dynamics and Control, Elsevier, vol. 28(9), pages 1707-1731, July.
    3. Duffy, John, 2006. "Agent-Based Models and Human Subject Experiments," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 19, pages 949-1011, Elsevier.
    4. Huber, Juergen & Shubik, Martin & Sunder, Shyam, 2007. "Three Minimal Market Institutions: Theory and Experimental Evidence," Working Papers 27, Yale University, Department of Economics.
    5. Marco LiCalzi & Lucia Milone & Paolo Pellizzari, 2011. "Allocative Efficiency and Traders’ Protection Under Zero Intelligence Behavior," Dynamic Modeling and Econometrics in Economics and Finance, in: Herbert Dawid & Willi Semmler (ed.), Computational Methods in Economic Dynamics, pages 5-28, Springer.
    6. Jamal, Karim & Sunder, Shyam, 1996. "Bayesian equilibrium in double auctions populated by biased heuristic traders," Journal of Economic Behavior & Organization, Elsevier, vol. 31(2), pages 273-291, November.
    7. Lange, Andreas & Ross, Johannes, 2024. "Internalizing match-dependent externalities," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 356-378.
    8. Giuseppe Attanasi & Samuele Centorrino & Elena Manzoni, 2020. "Zero-Intelligence vs. Human Agents: An Experimental Analysis of the Efficiency of Double Auctions and Over-the-Counter Markets of Varying Sizes," Working Papers 05/2020, University of Verona, Department of Economics.
    9. Karim Jamal & Michael Maier & Shyam Sunder, 2019. "Aggregation of Diverse Information with Double Auction Trading among Minimally-Intelligent Algorithmic Agents," Cowles Foundation Discussion Papers 2182, Cowles Foundation for Research in Economics, Yale University.
    10. Gjerstad, Steven & Dickhaut, John, 1998. "Price Formation in Double Auctions," Games and Economic Behavior, Elsevier, vol. 22(1), pages 1-29, January.
    11. Huber, Juergen & Shubik, Martin & Sunder, Shyam, 2010. "Three minimal market institutions with human and algorithmic agents: Theory and experimental evidence," Games and Economic Behavior, Elsevier, vol. 70(2), pages 403-424, November.
    12. Shyam Sunder, 2020. "Rational order from ‘irrational’ actions," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 19(2), pages 317-321, November.
    13. Antoni Bosch-Domenech & Shyam Sunder, 2000. "Tracking the Invisible Hand: Convergence of Double Auctions to Competitive Equilibrium," Computational Economics, Springer;Society for Computational Economics, vol. 16(3), pages 257-284, December.
    14. Micola, Augusto Ruperez & Bunn, Derek W., 2008. "Crossholdings, concentration and information in capacity-constrained sealed bid-offer auctions," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 748-766, June.
    15. Lu, Dong & Zhan, Yaosong, 2022. "Over-the-counter versus double auction in asset markets with near-zero-intelligence traders," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    16. Yeh, Chia-Hsuan, 2008. "The effects of intelligence on price discovery and market efficiency," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 613-625, December.
    17. Sabiou M. Inoua & Vernon L. Smith, 2022. "Perishable goods versus re-tradable assets: A theoretical reappraisal of a fundamental dichotomy," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 15, pages 162-171, Edward Elgar Publishing.
    18. Katerina Sherstyuk & Krit Phankitnirundorn & Michael J. Roberts, 2021. "Randomized double auctions: gains from trade, trader roles, and price discovery," Experimental Economics, Springer;Economic Science Association, vol. 24(4), pages 1325-1364, December.
    19. Jason F. Shogren, 2002. "Micromotives in Global Environmental Policy," Interfaces, INFORMS, vol. 32(5), pages 47-61, October.
    20. Alessandra Casella & Aniol Llorente-Saguer & Thomas R. Palfrey, 2012. "Competitive Equilibrium in Markets for Votes," Journal of Political Economy, University of Chicago Press, vol. 120(4), pages 593-658.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ysm:wpaper:ysm284. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/smyalus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.