Paving Wall Street : Experimental Economics and the Quest for the Perfect Market

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

• ISBN13: 9780471121985
• ISBN10: 0471121983
• Edition: 1st
• Format: Hardcover
• Copyright: 2001-12-21
• Publisher: Wiley

Summary

Praise for Paving Wall Street "This is a remarkable book that weaves the deep scientific roots of modern finance and modern financial institutions with humorous perspective and considerable wisdom. Few understand the pervasive and complex economic principles that govern our world of finance. Few are aware of the academic and scientific origins of financial practices and market instruments that are commonplace today. Ross Miller uses his experience and talents acquired as an experimental economist to help us understand a world that is contradictory, potentially dangerous, and paradoxical. He entertains us while doing it." --Charles R. Plott, Edward S. Harkness Professor of Economics and Political Science, California Institute of Technology "Decisions by millions of individuals produce the fierce tides and churning seas of Wall Street. Miller wields his microscope in the laboratory of experimental economics to provide a sprightly and insightful analysis of investor behavior." --Richard Zeckhauser, Frank P. Ramsey Professor of Political Economy, John F. Kennedy School of Government, Harvard University "Dramatic new ways for buying and selling-spectrum auctions, e-commerce, derivatives-are the economics profession's contribution to the Information Revolution. This book explains how many of these innovations began with simple experiments at Caltech. The style is a refreshing combination-dramatic and fun to read, but also historically and scientifically accurate. So, I can send one to my Dad, a salesman, and another to my girlfriend, a patent attorney." --Colin Camerer, Rea and Lela Axline Professor of Business Economics, California Institute of Technology "Paving Wall Street is a first-rate insight into bubbles and the experimental research performed on the topic by leading academicians such as Vernon Smith." --David Dreman, Chairman, Dreman Value Management "Academic ideas have revolutionized how Wall Street operates. Entirely new markets have been created. This revolution continues today, accelerated by the rise of increasingly automated markets. Ross Miller has produced a book that makes the leading-edge financial and economic thinking that shapes these new markets accessible to practitioners and professionals. With no equations and a deft touch, this is an excellent guide to the future of greater Wall Street." --David J. Leinweber, PhD, Economics/Social Sciences, California Institute of Technology

Author Biography

ROSS M. MILLER is founder and President of Miller Risk Advisors. After several years of teaching finance and economics at major universities, he established the quantitative finance research group at General Electric and then served as a Senior Vice President and Director of Research at an international investment bank. His articles have been widely published in journals such as Econometrica, the Journal of Portfolio Management, and Risk. Miller’s acclaimed textbook, Computer-Aided Financial Analysis, has been very well received.

Table of Contents

Foreword by Vernon L. Smith.

Preface.

Acknowledgments.

Chronology of Major Events.

PART I: BUBBLES AND EXPERIMENTS.

1 Wind Tunnel Markets.

Step into the Wind Tunnel.

Our Road Map.

2 Bargain Hunting.

Capturing the Human Element.

Rationality and Induced Value at Your Corner Grocer.

LetÆs Make a Deal.

Games and Strategies.

It Came from Harvard.

3 A Tale of Two Smiths.

The Law of Supply and Demand.

The Groping Market.

New Market Rules.

Perfect Without Knowledge.

4 Bubbles in the Lab.

Cycling Through Time.

The Seasonal Shift.

Speculators Enter the Laboratory.

Behold the Bubble.

On the Origin of Bubbles.

5 Bubbles in the Wild.

Asset Valuation and Efficient Markets.

From Noise to Irrationality.

Breaking the Bank.

Bubbles: Rational or Irrational?

Potholes on Wall Street.

PART II: INSIDE MARKETS: OPTIONS, INFORMATION, AND LIQUIDITY.

6 Black Monday.

Peering into the Abyss.

The Quantitative Finance Revolution.

ItÆs There Until You Need It.

Programmed to Trade.

7 All the WorldÆs an Option.

How Do You Value an Option?

The Formula for Options.

The Universal Nature of Options.

Options Rule on Wall Street.

Spreads and the Risk of Default.

Liquidity:The Ultimate Option.

8 The Invisible Hand Discovers Prices.

Price Impact and Market Manipulations.

Toward Instantaneous Price Discovery.

One-Sided Auction Markets.

VickeryÆs Solution.

Deviant Auctions.

9 Sending Signals and Keeping Score.

Lemons Squeeze the Market Mechanism.

The Theory of Market Signaling.

Learning to Signal in the Laboratory.

Prices as Scorekeepers.

The Art of Indexing.

The Limits to Aggregation.

10 It All Comes Down to Money.

Money, Expectations, and Illusion.

The Emergence of Money.

Future Money.

PART III: GRIDLOCK AND THE ROAD TO SMART MARKETS.

11 The Market Is Tied Up in Knots.

Long-Term Gridlock.

Arbitrage Has Its Limits.

Markets as Matchmakers.

Smart Enough to Weave a Basket.

12 Making Markets Intelligent.

Adding Baskets to the Market.

Self-Arbitraging Markets.

Recombinant Securities Markets.

All or Nothing at All.

Breaking the Law of a Single Price.

13 The Smart Auction Block.

Bandwidth for Sale.

Location, Location, Location . . . and Synergy,Too.

Combinatorial Auctions: Optimization on the Fly.

NASAÆs Awesome Wind Tunnel.

Learning by Doing at the FCC.

14 Good Intentions.

FCC versus SEC.

Powerless.

The Rules of Engagement.

Notes.

Bibliography.

Index.