Emergence of Information Aggregation to Rational Expectations Equilibria in Markets Populated by Biased Heuristic Traders

Information aggregation is a key economic function of markets. Evidence on limitations of human cognitive abilities have led some to doubt the usefulness and relevance of rational expectations equilibria in modeling information aggregation. We report results of a computational experiment with markets populated by simple algorithmic traders who follow two simple heuristics (anchor-and-adjust, and representativeness) commonly thought to yield biased outcomes. Outcomes of these markets tend to cluster around rational expectations equilibria, albeit more slowly and noisily than in markets populated by profit-motivated human traders. Our results illustrate the emergence of rational expectations equilibria through complex interactions among actions of biased heuristic traders with limited information processing capabilities