COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1868

Decoupling Markets and Individuals:
Rational Expectations Equilibrium Outcomes
from Information Dissemination among Boundedly-Rational Traders

Karim Jamal, University of Alberta
Michael Maier, University of Alberta
Shyam Sunder, Yale University

July 2012

Attainment of rational expectations equilibria in asset markets calls for the price system to disseminate traders’ private information to others. It is known that markets populated by asymmetrically-informed profit-motivated human traders can converge to rational expectations equilibria. This paper reports comparable market outcomes when human traders are replaced by boundedly-rational algorithmic agents who use a simple means-end heuristic. These algorithmic agents lack the capability to optimize; yet outcomes of markets populated by them converge near the equilibrium derived from optimization assumptions. These findings suggest that market structure is an important determinant of efficient aggregate level outcomes, and that care is necessary not to overstate the importance of human cognition and conscious optimization in such contexts.

JEL Classification: C92, D44, D50, D70, D82, G14

Keywords: Bounded rationality, Dissemination of asymmetric information, Efficiency of security markets, Minimally-rational agents, Rational expectations, Structural properties of markets