Experimental Economics : How We Can Build Better Financial Markets

by Miller, Ross M.; Smith, Vernon L.

• ISBN13: 9780471706250
• ISBN10: 0471706256
• Edition: 1st
• Format: Paperback
• Copyright: 2005-01-28
• Publisher: Wiley

Summary

In a little more than thirty years, the field of experimental economics has gone from obscurity to international recognition with the presentation of the 2002 Nobel Prize in Economics to Vernon L. Smith, who took a classroom exercise he saw as a Harvard graduate student and turned it into one of the hottest areas in economics. Experimental Economics is an engaging and accessible introduction to the field by Ross M. Miller, one of Professor Smiths first student collaborators and a pioneer in the application of experimental methods to financial markets. His book uses a series of experimental case studies to examine what makes markets work, what can cause them to break, and how experimental methods can be used to repair them.Order your copy of this dramatic and fun-to-read exploration of the ideas shaping the future of the global economy today.

Author Biography

ROSS M. MILLER teaches finance at the State University of New York at Albany and heads an international risk management consultancy with a client list that includes GE, Bank of America, Barclays, and MBIA. Previously, he was a senior vice president and director of research at National Westminster Bank. Miller is coauthor of the international bestseller What Went Wrong at Enron (Wiley).

Table of Contents

Foreword	vii
Vernon L. Smith
Preface	ix
Acknowledgments	xvii
Chronology of Major Events	xix
PART I BUBBLES AND EXPERIMENTS
Wind Tunnel Markets	3	(14)
Step into the Wind Tunnel	7	(4)
Our Road Map	11	(6)
Bargain Hunting	17	(22)
Capturing the Human Element	19	(1)
Rationality and Induced Value at Your Corner Grocer	20	(4)
Let's Make a Deal	24	(3)
Games and Strategies	27	(4)
It Came from Harvard	31	(8)
A Tale of Two Smiths	39	(20)
The Law of Supply and Demand	42	(6)
The Groping Market	48	(2)
New Market Rules	50	(5)
Perfect Without Knowledge	55	(4)
Bubbles in the Lab	59	(28)
Cycling Through Time	59	(8)
The Seasonal Shift	67	(4)
Speculators Enter the Laboratory	71	(6)
Behold the Bubble	77	(6)
On the Origin of Bubbles	83	(4)
Bubbles in the Wild	87	(22)
Asset Valuation and Efficient Markets	88	(4)
From Noise to Irrationality	92	(4)
Breaking the Bank	96	(5)
Bubbles: Rational or Irrational?	101	(1)
Potholes on Wall Street	102	(7)
PART II INSIDE MARKETS: OPTIONS, INFORMATION, AND LIQUIDITY
Black Monday	109	(18)
Peering into the Abyss	110	(2)
The Quantitative Finance Revolution	112	(6)
It's There Until You Need It	118	(3)
Programmed to Trade	121	(6)
All the World's an Option	127	(26)
How Do You Value an Option?	129	(7)
The Formula for Options	136	(5)
The Universal Nature of Options	141	(3)
Options Rule on Wall Street	144	(4)
Spreads and the Risk of Default	148	(1)
Liquidity: The Ultimate Option	149	(4)
The Invisible Hand Discovers Prices	153	(18)
Price Impact and Market Manipulations	156	(4)
Toward Instantaneous Price Discovery	160	(3)
One-Sided Auction Markets	163	(2)
Vickery's Solution	165	(3)
Deviant Auctions	168	(3)
Sending Signals and Keeping Score	171	(22)
Lemons Squeeze the Market Mechanism	172	(3)
The Theory of Market Signaling	175	(4)
Learning to Signal in the Laboratory	179	(4)
Prices as Scorekeepers	183	(2)
The Art of Indexing	185	(3)
The Limits to Aggregation	188	(5)
It All Comes Down to Money	193	(14)
Money, Expectations, and Illusion	196	(5)
The Emergence of Money	201	(1)
Future Money	202	(5)
PART III GRIDLOCK AND THE ROAD TO SMART MARKETS
The Market Is Tied Up in Knots	207	(18)
Long-Term Gridlock	209	(6)
Arbitrage Has Its Limits	215	(3)
Markets as Matchmakers	218	(2)
Smart Enough to Weave a Basket	220	(5)
Making Markets Intelligent	225	(18)
Adding Baskets to the Market	227	(3)
Self-Arbitraging Markets	230	(5)
Recombinant Securities Markets	235	(1)
All or Nothing at All	236	(2)
Breaking the Law of a Single Price	238	(5)
The Smart Auction Block	243	(18)
Bandwidth for Sale	244	(2)
Location, Location, Location and Synergy, Too	246	(5)
Combinatorial Auctions: Optimization on the Fly	251	(2)
NASA's Awesome Wind Tunnel	253	(3)
Learning by Doing at the FCC	256	(5)
Good Intentions	261	(10)
FCC versus SEC	263	(2)
Powerless	265	(3)
The Rules of Engagement	268	(3)
Notes	271	(16)
Bibliography	287	(16)
Index	303