Abstract
The continuous double auction (CDA) is a well-studied and widely used trading institution. However, there is no universally accepted theory regarding the dynamics of price formation, especially within the first period, that has endured experimental testing. In this paper, we introduce a behavioral model called IEL-CDA, which builds upon the Individual Evolutionary Learning (IEL) model of Arifovic et al. (2022). We enhance IEL by (a) incorporating Marshallian Selection, favoring traders with a higher expected surplus in making offers, and (b) allowing a trader's hypothetical reasoning to depend on the history of transactions. Using new experimental data, we test the hypothesis that efficiencies and average prices observed in the experiments follow the same distribution as those produced by simulations with various models. The hypothesis is rejected for both the Zero Intelligent theory of Gode and Sunder (1993) and IEL; however, it is not rejected for IEL-CDA. Therefore, IEL-CDA emerges as a more accurate theory of behavior in the continuous double auction.
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