Vernon L. Smith (Chapman University)

Vernon L. Smith (Chapman University)

Nov 9 2017
On Learning from Proving Yourself Wrong: Two Cases from Experimental Economics, with Implications and Insights for the Economy

About Smith:

Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. He has the George L. Argyros Chair in Finance and Economics, and is a Research Scholar in the Economic Science Institute at Chapman University. He is the President and founder of the International Foundation for Research in Experimental Economics since 1997.

Dr. Smith has authored or co-authored more than 290 articles and books on capital theory, finance, natural resource economics and experimental economics. He serves or has served on the board of editors of the American Economic Review, The Cato Journal, Journal of Economic Behavior and Organization, the Journal of Risk and Uncertainty, Science, Economic Theory, Economic Design, Games and Economic Behavior, The Independent Review and the Journal of Economic Methodology.

Dr. Smith is a distinguished fellow of the American Economic Association, and the 1995 Adam Smith Award recipient conferred by the Association for Private Enterprise Education. He was elected a member of the National Academy of Sciences in 1995, and received CalTech's distinguished alumni award in 1996. He has served as a consultant on the design of electric power systems in Australia and New Zealand and participated in numerous private and public discussions of regulatory reform in the United States. In 1997 he served as a Blue Ribbon Panel Member, National Electric Reliability Council.

Dr. Smith completed his undergraduate degree in electrical engineering at the California Institute of Technology, his master's degree in economics at the University of Kansas, and his Ph.D. in economics at Harvard.


About the lecture:

Science provides many examples in which the information gained from experiments fails to confirm widely held professional beliefs. Although beliefs eventually change, the process is commonly slow and resisted. This “confirmation bias” is surely good insofar as beliefs only change in response to stable and well-established evidence.

This lecture will address two cases of commonly held false beliefs about economic behavior and markets that have changed in my lifetime.

First, in the 1950s-1960s, the false belief that complete information is a necessary condition for yielding convergence to efficient competitive outcomes as predicted by abstract supply and demand theory. Ultimately, these experiments led to the development of new markets in the electric power, transportation and communication industries. 

Second, in the 1980s, the false belief that complete information asset markets cannot yield price bubbles, defined as prices that deviate systematically from the asset’s fundamental value.

I will use these examples to discuss the question: What happened in the neo-classical revolution of the 1870s, and after, that ill-prepared us for the supply and demand, and asset market experimental discoveries, in the last half of the 20th century?

I will also develop some of the consequences of these examples for the broader economy based on an update of my joint work with Steven Gjerstad, RETHINKING HOUSING BUBBLES, Cambridge, 2014.
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