BAYESIAN EQUILIBRIUM IN DOUBLE AUCTIONS POPULATED BY BIASED HEURISTICTRADERS

We use computer simulation to examine three asset markets with imperfe ct information. In processing imperfect information, traders in the th ree markets are bayesian, empirical bayesian, and heuristic (represent ativeness and anchor-and-adjust) respectively. All three converge to t he same bayesian equilibrium - although the latter two converge more s lowly - without profit maximization, natural selection, arbitrage, or mutual cancellation of random actions. The results support Becker (196 2) and Simon (1973) in that the rationality of the market emerges as a consequence of the market structure, and not from the rationality of individuals.