Computational complexity and information asymmetry in financial products

Journal Article (Journal Article)

Computational complexity studies intractable problems like NP-complete problems, which are conjectured to require more computational resources than can be provided by the fastest computers. The intractability of this problem leads to a concrete realization of information asymmetry. Computational complexity immediately implies the existence of hard-to-price derivatives, albeit unnatural ones. Consider for example a derivative whose contract contains a 10,000 digit integer n and has a nonzero payoff if the unemployment rate next January, when rounded to the nearest integer, is the last digit of a factor of n. Computational complexity can be related to the bounded rationality concept in economics. A seller who knows he has a non-lemon would be unwilling to sell for $800, and would therefore withdraw from the market. The market would be left only with lemons, and knowing this, buyers would refuse to buy any car.

Full Text

Duke Authors

Cited Authors

  • Arora, S; Barak, B; Brunnermeier, M; Ge, R

Published Date

  • May 1, 2011

Published In

Volume / Issue

  • 54 / 5

Start / End Page

  • 101 - 107

Electronic International Standard Serial Number (EISSN)

  • 1557-7317

International Standard Serial Number (ISSN)

  • 0001-0782

Digital Object Identifier (DOI)

  • 10.1145/1941487.1941511

Citation Source

  • Scopus