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Supply and Demand from the Bottom Up aka Zero-Intelligence Traders Rob Axtell Brookings and Santa Fe Outline • Experiment: “The Market for Apples” – From Bergstrom and Miller, Experiments with Economic Principles” • Agent-based model of your behavior – Simplest possible model – Object-oriented implementation • Gode and Sunder: “Zero-Intelligence” traders Experiment • Each of you is either a buyer or seller • Buyers: – Have internal value – Wish to acquire 1 unit • Sellers: – Have cost to cover – Wish to sell 1 unit • Market proceeds until no further trades possible Round 1 30 25 20 15 10 5 3 6 9 12 15 18 Round 2 30 25 20 15 10 5 3 6 9 12 15 18 Zero-Intelligence Traders • Population of agents • Random matching of buyers and sellers • If buyer.value > seller.cost then pick random price between these limits • Repeat until no more trades possible • What is the distribution of prices? • What is the quantity sold? Summary • Simple in-class experiment yields price heterogeneity, quantity about right • ‘Zero-intelligence’ trading model (random pairing, random formation of ‘bid’ and ‘ask’ prices, random exchange price) is capable of reproducing qualitiative results of the experiments • This represents a bottom-up model of supply and demand