Development in India by S. Mahendra Dev & P. G. Babu

Author:S. Mahendra Dev & P. G. Babu
Language: eng
Format: epub
Publisher: Springer India, New Delhi

Even a cursory glance at the results in these three panels makes it clear that most of the difference between the market outcomes of unconstrained random behavior in the top panel and profit-motivated human behavior in the bottom panel is accounted for by a single simple constraint on algorithms: do not bid above your value and do not ask below your cost, i.e., do not incur any losses. This level of “rationality” is hardly beyond human faculties and at market level it yields prices and allocative efficiency (not shown here) which is comparable to the theoretical equilibria even in absence of optimization, memory, or learning on part of these algorithmic traders. Gode et al. (2004) show a similar result for ZI traders converging near the Pareto optimal allocations in an Edgeworth box.

In a second example, Jamal et al. (2012) have taken this work a step further by examining the ability of markets populated by minimally intelligent algorithmic traders to disseminate information and achieve RE equilibria. Figure 10.19 compares the price paths observed by Plott and Sunder (1982) with profit-motivated human traders, against the price paths observed in the same markets with simple algorithmic traders defined by two features: (1) Newell and Simon’s means-end heuristic to adjust the aspiration level on the basis of observed transaction prices using a first order adaptive process; and (2) zero-intelligence (i.e., random) bids and asks relative to these aspiration levels. The single price path of human markets is shown in blue against the cloud of algorithmic price paths from 50 independent replications, and the median of the 50 paths shown in red line, all against a background of RE equilibrium prediction in green line and PI equilibrium prediction in broken line. The results suggest that in price paths (as well as in allocative efficiency not shown here), minimal levels of rationality in individuals suffice to take markets close to their equilibria, although the latter are derived from strong rationality assumptions.

Fig. 10.19Dissemination of information in markets with minimally-intelligent traders (Source Jamal et al. 2012, Fig. 3) (Color figure online)

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