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Computational complexity and information asymmetry in financial products

Publication ,  Journal Article
Arora, S; Barak, B; Brunnermeier, M; Ge, R
Published in: Communications of the ACM
May 1, 2011

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.

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Published In

Communications of the ACM

DOI

EISSN

1557-7317

ISSN

0001-0782

Publication Date

May 1, 2011

Volume

54

Issue

5

Start / End Page

101 / 107

Related Subject Headings

  • Information Systems
  • 46 Information and computing sciences
  • 08 Information and Computing Sciences
 

Citation

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Arora, S., Barak, B., Brunnermeier, M., & Ge, R. (2011). Computational complexity and information asymmetry in financial products. Communications of the ACM, 54(5), 101–107. https://doi.org/10.1145/1941487.1941511
Arora, S., B. Barak, M. Brunnermeier, and R. Ge. “Computational complexity and information asymmetry in financial products.” Communications of the ACM 54, no. 5 (May 1, 2011): 101–7. https://doi.org/10.1145/1941487.1941511.
Arora S, Barak B, Brunnermeier M, Ge R. Computational complexity and information asymmetry in financial products. Communications of the ACM. 2011 May 1;54(5):101–7.
Arora, S., et al. “Computational complexity and information asymmetry in financial products.” Communications of the ACM, vol. 54, no. 5, May 2011, pp. 101–07. Scopus, doi:10.1145/1941487.1941511.
Arora S, Barak B, Brunnermeier M, Ge R. Computational complexity and information asymmetry in financial products. Communications of the ACM. 2011 May 1;54(5):101–107.

Published In

Communications of the ACM

DOI

EISSN

1557-7317

ISSN

0001-0782

Publication Date

May 1, 2011

Volume

54

Issue

5

Start / End Page

101 / 107

Related Subject Headings

  • Information Systems
  • 46 Information and computing sciences
  • 08 Information and Computing Sciences