1. Humans, Automatons and Markets Shyam Sunder, Yale University Information Systems-American Accounting Association January 6, 2006, Scottsdale AZ

2. IS-AAA2 Overview Work is fun Humans, Automatons and Markets Overcoming some obstacles A couple of ideas/proposals

3. IS-AAA3 Humans, Automatons and Markets Stock market crash Blame the program traders Why would program traders cause the market to crash Teaching as discovery: a new course on program trading Serendipity Structure or behavior Gode, Dhananjay K. and Shyam Sunder, “Allocative Efficiency of Markets with Zero Intelligence Traders: Market as a Partial Substitute for Individual Rationality,” The Journal of Political Economy, Vol. 101, No. 1 (February 1993), 119-137. Sunder, Shyam. “Markets as Artifacts: Aggregate Efficiency from Zero- Intelligence Traders.” In M. E. Augier and J. G. March, eds., Models of a Man: Essays in Memory of Herbert A. Simon. Cambridge, MA: MIT Press, 2004; 501-520. Shyam Sunder, “Economic Theory: Structural Abstraction or Behavioral Abstraction,” History of Political Economy (Forthcoming 2005)

4. IS-AAA4

5. 5 Double Auctions with “Zero- Intelligence” Automatons Random bids and asks “No loss” constraint internal or external Markets converge to CE Much greater variability in prices How could this be? Some algebra and statistics produce the same results

6. IS-AAA6 Maximization Principle Economists use it to derive equilibria Psychologists point out that people don’t The apparent conflict of the two disciplines A resolution of the paradox: –Market institutions as society’s answer to human cognitive limitations. In classical environments, markets can approach the aggregate order (pareto optimum) even when the individual do not know how to.

7. IS-AAA7 Use vs. Necessity Optimization principle used to derive equilibria in economics –Imported from physics We tell ourselves, and out students the Walrasian auction story Some have come to believe that optimization is necessary, at least useful, for equilibrium The two may, in fact, be almost independent On the other hand, the usefulness of equilibrium for designing trading strategies is uncertain at best

8. IS-AAA8 Understanding Market Institutions In an astonishing variety of contexts, apparently complex structures or behaviors emerge from systems characterized by very simple rules. (Murray Gell-Mann, The Quark and the Jaguar, p. 99-100)

9. IS-AAA9 Understanding Markets This skyhook-skyscraper construction of science from the roof down to the yet unconstructed foundations was possible because the behavior of the system at each level depended on only a very approximate, simplified, abstracted characterization of the system at the level next beneath. This is lucky, else the safety of bridges and airplanes might depend on the correctness of the “Eightfold Way” of looking at elementary particles. (Herbert A. Simon, The Sciences of the Artificial, 1996, p. 16).

10. IS-AAA10 Economic Theory It is worth defending on this ground Optimization is a useful structural principle (as in physics) It need not be thought of as a behavioral principle (although it is hard not to, in economics) Theory is actually more robust than its proponents might have believed: Adam Smith to Arrow-Debreu Math derivations, lab experiments asking subjects to make as much money as they can

11. IS-AAA11 What We Learned That markets can approach the conditions of the first fundamental theorem without actual or attempted optimization met skeptical response a few years ago Actually achievable, within context of specific market institutions, under behavior that barely qualifies as rational and certainly not optimal Minimal rationality foundations for economics The importance of being intelligent lies in personal vanity; society needn’t care. And it doesn’t. It does care about the importance of being earnest. (Ask about the ZI traders).

12. IS-AAA12 Designing Trading Automatons Can cyborg traders improve on human performance in markets? Economics, psychology, sociology, computer science Limits of automatons? Shyam Sunder, “Humans, Automatons and Markets: Designing Trading Automatons,” Lecture 1 of Distinguished Lectures, Center for Computational Finance and Economic Agents, University of Essex, U.K., March 2004.

13. IS-AAA13 What to Do about Junk E-Mail? Human attention is the scarce resource Use pricing mechanism to allocate it efficiently for its most economical use Functions of postage in a mail system Will a modified “postage” system work? Robert E. Kraut, Shyam Sunder, Rahul Telang and James Morris. 2005. “Pricing Electronic Mail To Solve the Problem of Spam,” Human Computer Interaction Vol. 20, pp. 195-223. Robert E. Kraut, S. Sunder, J. Morris, R. Telang, D. Filer, & M. Cronin, (2002). “Markets for attention: Will postage for email help?” Proceedings of the 2002 ACM Conference on Computer Supported Cooperative Work, New Orleans, Louisiana, USA. New York, NY: ACM Press, pp. 206-215.

14. IS-AAA14 Squeezing the Fun out of Research Departmentalization of research and hyper-specialization Research as a device for credentialing Teaching the young to think of research as a production process to attain their career goals (e.g., doctoral and new faculty consortia)

15. IS-AAA15 Putting Fun Back into Research Respect no boundaries Pursue my own instincts (not of grey eminences), and take the consequences (and risk; high risk, high return means that you take the risk, returns are not guaranteed) Rethink our doctoral education and consortia (individuality and variation vs. spreading uniformity and cynicism)

16. IS-AAA16 Ideas for AAA No organization has the ability to direct individual research and creativity Organizations can provide better facilities, and infrastructure for research, and means of its communication and dissemination Using new electronic platform for creating new channels of dissemination and interaction Global web portal for accounting archives and literature

17. Discussion, Your Ideas and Suggestions

18. Shyam.sunder@yale.edu www.som.yale.edu/faculty/sunder