Financial market design and bounded rationality: An experiment

Adaptive Traders and the Design of Financial Markets

“…In addition, my result that Walrasian tatonnement fosters learning is in line with the experimental evidence on sequential auctions (Kagel, Harstad, and Levin (1987), and Kagel and Levin (2001)) and on sequential markets (Pouget (2007)). In this last paper, experimental subjects confronted with similar environments and market institutions are able to discover equilibrium in a Walrasian tatonnement but not in a call market.…”

“…Following Pouget (2007), one can show that when traders are perfectly rational, the revealing REE is also a Perfect Bayesian Equilibrium. This result holds because traders can only exchange one unit of the asset, which prevents them from having market impact.…”

“…The above discussion implies that, whether one considers price‐taking or strategic behavior, a revealing equilibrium exists. Following Pouget (2006), one can show that all the gains from trade are exploited at equilibrium. This equilibrium analysis also implies that because the equilibrium is fully revealing, informed and uninformed traders should earn the same gains from trade (i.e., x per trader).…”

Bubbles and Crashes in Experimental Asset Markets

“…In a continuous double auction, an order book is maintained and auctioning continues after transactions take place. Uninformed traders did not participate in the call market to the extent predicted by theory, a fact that Pouget (2007) traced to bounded rationality and strategic uncertainty. In a posted pricing market, sellers (buyers) independently select reservation price levels, which are then communicated to the market.…”

“…When a buyer (seller) submits a bid (ask) which equals or exceeds (equals or is smaller than) the lowest ask (highest bid) in the market, a transaction takes place. Similarly, Pouget (2007) compared the performance of a call market and a Walrasian tâtonnement, making sure that both market institutions had similar equilibrium outcomes in both prices and allocations. The bid (offer) auction is similar to the double auction, with the difference that only the buyers (sellers) may post price quotes, while sellers' (buyers') single possible action is to accept a bid (offer).…”