Zero is Not Enough: On The Lower Limit of Agent Intelligence For Continuous Double Auction Markets†

Abstract

Gode and Sunder's (1993) results from using "zero-intelligence" (ZI) traders, that act randomly within a structured market, appear to imply that convergence to the theoretical equilibrium price in continuous double-auction markets is determined more by market structure than by the intelligence of the traders in that market. However, it is demonstrated here that the average transaction prices of ZI traders can vary significantly from the theoretical equilibrium value when the market supply and demand are asymmetric, and that the degree of difference from equilibrium is predictable from a priori probabilistic analysis. In this sense, it is shown here that Gode and Sunder's results are artefacts of their experimental regime. Following this, 'zero-intelligence-plus' (ZIP) traders are introduced: like ZI traders, these simple agents make stochastic bids. Unlike ZI traders, they employ an elementary form of machine learning. Groups of ZIP traders interacting in experimental markets similar to those used by Smith (1962) and Gode and Sunder (1993) are demonstrated, and we show that the performance of ZIP traders is significantly closer to the human data than is the performance of Gode and Sunder's ZI traders. Because ZI traders are too simple, we offer ZIP traders as a slight upward revision of the intelligence required to achieve equilibrium in continuous double auction markets.

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