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Zero-Intelligence Trading in Markets

Mark E. McBride, Miami University
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This material was originally created for Starting Point: Teaching Economics
and is replicated here as part of the SERC Pedagogic Service.

Summary

mark
In the Zero-Intelligence Trader lab, students run computerized experiments based on the work of Gode and Sunder (1993). The agent-based simulation model involves zero-inteligence buyers and sellers trading in a simple order-book market by placing randomly determined bids and asks. The students look for how the structural parameters of the market affect market efficiency. The model is designed to serve as either a follow-up to the students participating in a classroom experiment or stand-alone. Students complete a lab report and homework exercise based on their findings in preparation for class discussion.


Learning Goals

The main goal of the simulation is to have students confront the question originally posed by Gode and Sunder (1993): Is it the structure of the market or is it the rationality of humans that influence efficiency in markets? A secondary goal of the simulation is to introduce students to the basics of setting up and running a computerized economics experiment.

Context for Use

The simulation can be used in the principles of microeconomics course or an upper-division microeconomics course of any class size. The students only need a web browser capable of running Java. Students learn how to use the simulation through a lab exercise which guides the students through a simple experimental design. The simulation and lab are designed to be used after the students have learned the basics of demand and supply. The impact of the insights are greater if the students have also participated in a double-auction market classroom experiment prior to running the simulation.

Description and Teaching Materials

The simulation, sample lab, and sample homework are available at the Zero-Intelligence Trading web site. A lab exercise (pdf format) is available for download by the students. The exercise steps them through running the simulation exercise.

The simulation runs within a browser window. There is an option for the student to download the Netlogo model and run the simulation from within Netlogo directly. The description of the simulation is included with this option: what it is, how it works, how to use it, things to notice, and things to try. Students complete a lab report and homework exercise based on their findings in preparation for class discussion.

TIME REQUIREMENTS:
Instructor preparation: 4 hours.
Class preparation: One 50 minute class period. Class simulation: One 50 minute class period.

Teaching Notes and Tips

The simulation has its greatest impact if the students first participate in a double-auction classroom experiment. The double-auction experiment illustrates that a high degree of market efficiency can be achieved by human participants. By next having the students complete the activities associated with the ZI-Trader simulation, students start to realize that human rationality may or may not be the source of the efficiency since the randomly acting ZI-Traders achieve market efficiency levels similar to humans.

Microeconomics principles students are a little puzzled by the simulation at first since the simulation just requires them to press setup, then run, and record the simulation data. Thus it becomes important to set the stage before hand and to have them discuss the results in class.

For an upper-division microeconomics course, the instructor may want to have the students download the Netlogo model. The ZI-Trader Netlogo model includes a sample experiment that can be run using Netlogo's BehaviorSpace tool.

Assessment

Assessment can be done through a daily feedback mechanism in the Principles of Microeconomics course. Class discussion reveals whether the students are confronting the main goal of the simulation.

In addition, all traditional assessment tools can be used. For more information about assessment, see the SERC assessment module.

References and Resources

The Netlogo web site provides access to the Netlogo desktop application. The Netlogo web site provides access to the Netlogo desktop application. While not required to run the simulation in a browser, faculty and students may wish to download and explore the simulation further from within the desktop application.

Gode, D. K., and S. Sunder. (1993). Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality. Journal of Political Economy, 101(Feb.), 119-137.

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