Individual Rationality as a Partial Impediment to Market Efficiency

Abstract

In this chapter we conduct two experiments within an agent-based double auction market. These two experiments allow us to see the effect of learning and smartness on price dynamics and allocative efficiency. Our results are largely consistent with the stylized facts observed in experimental economics with human subjects. From the amelioration of price deviation and allocative efficiency, the effect of learning is vividly seen. However, smartness does not enhance market performance. In fact, the experiment with smarter agents (agents without a quote limit) results in a less stable price dynamics and lower allocative efficiency.