How intelligent does economic agents need to be?

Economic theory predicts that auctions between rational agents will create an efficient market. How rational do they need to be?

Double-auction markets are used in many different situations in everyday life and the best known example is probably the stock market. The auction is employed to decide the price where supply meets demand. This is the basis of much of economic theory and it is often stated that the price equilibrium occurs when rational agents interacts in an auction. However, these results rely on homogeneous agents, which is not true in real-world applications. Also, humans are not always rational and it is therefore interesting to ask the question “Under which restrictions on the agents does the market reach equilibrium?”.

This aim of this project is to study this by simulating markets with heterogeneous agents and compare the results with the analytical results. These agents are equipped with a varying amount of adaptability and the aim of the thesis is to analyse how much of this adaptability that is needed to mimic markets with human actors. The importance of this problem is large, as many economic theories depend on the assumption of rational and intelligent human actors. This assumption is often disputed and is probably false, as human actors do not respond and are irrational in their behaviour.

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