Financial market design and bounded rationality: An experiment

This paper experimentally compares a Call Market and a Walrasian Tatonnement under asymmetric information. The experimental environment and the market institutions are such that, at the theoretical equilibria, the two trading institutions exhibit identical prices and surpluses. During the experiment, prices are fully revealing on the two trading venues. However, the gains from trade are higher on the Walrasian Tatonnement than on the Call Market. This is because uninformed agents trade less on the CM. I show that this behavior is due to bounded rationality and strategic uncertainty, and that the Walrasian Tatonnement fosters learning by mitigating the impact of both factors. This paper supports the view that trading institutions should be designed including cognitively ergonomic features to fit the limited nature of human rationality.