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.

From the Inside Flap

Paving Wall Street explores the unfinished business of capitalism. While markets have prevailed over central planning in one country after another, Wall Street continues to experience disconcerting episodes of exuberance and despair. Traditional methods of financial and economic analysis provide little comfort for typical investors, whose supposed irrationality often serves as a scapegoat for the market's problems.

Dr. Miller presents an engaging account of experimental economics, a new field that examines the interplay between markets and human behavior under controlled conditions. Experimental economists have been able to reproduce the stock market bubbles and crashes in laboratories around the world. While human psychology may contribute to the market's problems, experimentalists have found that even a simple change in the rules that govern a market can lead to a dramatic improvement in its performance. A natural outgrowth of experimental economics has been the creation of "smart markets" designed to overcome the flaws of existing markets.

Paving Wall Street is packed with insights into why financial markets behave the way they do and where they might be headed in the future. Whether you manage your own portfolio or are just curious about what moves the market, this book will open your eyes to the inner workings of Wall Street and the global economy.

About the Author

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 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

Let' Make a Deal

Games and Strategies

It Came from Harvard

3 A Tale ofTwo 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

It's There Until You Need It

Programmed to Trade

7 All the World's an Option

How Do You Value an Option?

The Formulafor 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

Vickery's 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

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 atAll

Breaking the Law of a Single Price

13 The Smart Auction Block

Bandwidthfor Sale

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

CombinatorialAuctions: Optimization on the Fly

NASA's Awesome Wind Tunnel

Learning by Doing at the FCC

14 Good Intentions

FCC versus SEC

Powerless

The Rules of Engagement



Notes

Bibliography

Index