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Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality
Abstract
We report market experiments in which human traders are replaced by "zero-intelligence" programs that submit random bids and offers. Imposing a budget constraint (i.e., not permitting traders to sell below their costs or buy above their values) is sufficient to raise the allocative efficiency of these auctions close to 100 percent. Allocative efficiency of a double auction derives 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.
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Citations
Cites
Irrational Behavior and Economic Theory
Becker, G. S. (1962) · Journal of Political Economy · doi:10.1086/258584 · Cited by 1,156
Cited by
Shared Mental Models: Ideologies and Institutions
DENZAU, A. T., & NORTH, D. C. (1994) · Kyklos · doi:10.1111/j.1467-6435.1994.tb02246.x · Cited by 2,194
Hodgson, G. M. (2006) · Journal of Economic Issues · doi:10.1080/00213624.2006.11506879 · Cited by 2,108
An Engine, Not a Camera: How Financial Models Shape Markets
MacKenzie, D. (2006) · doi:10.7551/mitpress/9780262134606.001.0001 · Cited by 1,766
Peripheral Vision: Economic Markets as Calculative Collective Devices
Callon, M., & Muniesa, F. (2005) · Organization Studies · doi:10.1177/0170840605056393 · Cited by 1,378
A blockchain-based smart grid: towards sustainable local energy markets
Mengelkamp, E., Notheisen, B., Beer, C., Dauer, D., & Weinhardt, C. (2018) · Computer Science - Research and Development · doi:10.1007/s00450-017-0360-9 · Cited by 840
Metadata
- Authors
- Gode, D. K., & Sunder, S.
- Venue
- Journal of Political Economy
- Publisher
- University of Chicago Press
- Published
- 1993-02
- Volume
- 101
- Issue
- 1
- Pages
- 119-137
- ISSN
- 0022-3808 (ISSN-L)
- 1537-534X
- OpenAlex
- W2018567859
- Cited by
- 1,652
- References
- 1
- FWCI
- 12.98
- Type
- journal article
- Language
- en
- Open access
- closed
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- Gode, D. K., & Sunder, S. (1993). Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality. Journal of Political Economy. https://doi.org/10.1086/261868
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