Experimental Economics: How We Can Build Better Financial Markets: How We Can Build Better Financial Markets: How We Can Build Better Financial Markets. Foreword by Vernon L. Smith - Softcover

Miller, Ross M.

Softcover

ISBN 10: 0471706256 ISBN 13: 9780471706250

Verlag: John Wiley &Sons, 2018

Inhaltsangabe

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 Smith's 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.

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Über die Autorin bzw. den Autor

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).

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Praise for Experimental Economics
 
"The best account of all of the new developments [in economics] moves far beyond Peter Bernstein's two classic volumes, Capital Ideas and Against the Gods."
-David Warsh, Boston Globe
 
"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
 
"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
 
"[Experimental Economics] is a provocative summary of recent decades of economic research. The investor who wants to know the theory behind the markets in which he trades, the economist who has been out of the academic mainstream for many years, and the interested general reader can spend many evenings mulling over the revolution in economics that has occurred since Smith's assumptions of market perfection were challenged. Mr. Miller makes mathematical finance relevant and sometimes even poignant. His book is a marvel of combining anecdote with theory all without so much as a single partial differential equation."
-Andrew Allentuck, Globe and Mail (Toronto)

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Experimental Economics

How We Can Build Better Financial MarketsBy Ross M. Miller

John Wiley & Sons

Copyright © 2005 Ross M. Miller
All right reserved.
ISBN: 9780471706250

Chapter One

Wind Tunnel Markets

On a typical Monday, the floor of the New York Stock Exchange is a beehive of activity from the opening bell at 9:30 in the morning until the closing gavel at four in the afternoon. October 27, 1997, however, was not a typical Monday. For exactly 30 minutes and 5 seconds-from 2:35:55 P.M. until 3:06:00 P.M.-all trading stopped. Traders who would normally be milling from post to post, gesturing madly to get the attention of one of the specialists who maintain the order books for each stock, prepared for trading to resume. On a few previous occasions, the entire exchange had shut down for a computer or power outage or to help members deal with a snowstorm; trading halts in individual stocks pending important news are an everyday occurrence. Now, for the first time in history, the government had brought the New York Stock Exchange to a complete standstill.

The day had started out as just another in a string of bad days when news of financial woes in Asia weighed on the U.S. markets. The problems had begun in July with the devaluation of Thailand's currency-the baht-and, with each passing day, it seemed like the crisis had spread so far through Asia's other emerging economies that its impact would eventually be felt in the United States. On Friday, the Dow Jones Industrial Average had closed a tad above 7700, down from 8200 a month earlier, but still up 200 percent from the beginning of its latest climb in 1990.This had been a most impressive run for the market. The Dow continued lower on Monday, declining steadily throughout the morning to fall below 7550 shortly before noon. The market then attempted to stage a rally, making it feebly back to 7600 at the stroke of noon. As this rally faltered, panic began to spread through the market.

By one o'clock, the Dow had fallen to 7500 and the minds of traders on the floor, as well as those around the globe, undoubtedly focused on a market regulation that had never come into play before-the circuit breakers. This regulation required that all trading in U.S. stocks be automatically suspended for 30 minutes as soon as the Dow Jones Industrial Average declined 350 points from its previous close. Designed as a time out mechanism for the market, the circuit breakers forced traders to go back to their corners-providing them with the chance to reflect on their actions. This time could also provide the opportunity for a savior to step in and bail out the market. But, most important of all, the inventors of the circuit breakers hoped that their mere existence-even if they were never triggered-would reassure the market that a safety net was in place to catch a falling market, thereby nipping panic in the bud.

As two o'clock approached, it was clear that the circuit breakers overhanging the market had not allayed the panic; instead they had helped to fuel it. Disconcerted by the prospect of being locked into their positions when the market was shut down, many traders dumped stock while they still could. The very presence of the 350-point circuit breaker contributed to its being tripped soon after the half hour with the Dow just above 7360. Indeed, many traders believed that the circuit breakers had acted like a magnet. Instead of breaking the market's fall, each circuit breaker pulled the market down to it.

During their maiden voyage into market limbo, traders had time to contemplate something even more ominous-the next circuit breaker. If the Dow fell another 200 points, placing it down 550 points for the day, a second circuit breaker would be triggered-this one suspending trade for a full hour. Given that the first circuit breaker would not be lifted until after three o'clock and the market was scheduled to shut down at four o'clock, the tripping of the second circuit breaker would shut down the market for the day. This second circuit breaker proved to be an even stronger magnet than the first.

After mulling over the second circuit breaker, traders continued to sell like there was no tomorrow when the market reopened. For those traders whose capital would be wiped out by margin calls, forcing the liquidation of their positions at tremendous losses, there would indeed be no tomorrow. The anticipated plunge in the market tripped the second circuit breaker in just 24 minutes. The circuit breaker would have been tripped immediately except that the loss in each of the 30 stocks that made up the Dow would not register on the Average until buyers and sellers could agree upon a price at which to trade. With the market verging on mayhem, it took several minutes for most stocks to resume trading. As each Dow stock opened, the Average fell several more points to reflect its new, lower price. Because the market was now moving downward by leaps, the Dow overshot the second circuit breaker; trading halted for the day after the Dow had fallen 554 points to close at 7161.

Monday, October 27, 1997, quickly made a name for itself; indeed, it made several names for itself, the most popular of which was Blue Monday, which is how this book will refer to it. One name that was not available was Black Monday-it had already been taken by the record-breaking crash 10 years earlier on October 19, 1987. That plunge was so terrifying that the circuit breakers that were triggered on Blue Monday were instituted in an effort to prevent a replay of Black Monday's events.

After the market's early close at 3:30 P.M., the president of the New York Stock Exchange met with the press and proclaimed that the circuit breakers had worked as intended. Nonetheless, they were soon modified so that a 10 percent decline in the market rather than any specific point move would trigger them. In the future, changes in the settings for the circuit breakers would be largely automatic and would require only token administrative action. (The circuit breaker limits had only been minimally adjusted prior to Blue Monday.) Had the upgraded circuit breakers been in place on Blue Monday, it is doubtful that they would have been triggered at all. The only good thing that came out of the early close of the market was that it reset the circuit breakers. On the next day, another 350-point decline in the Dow would be needed to trip the first circuit breaker.

The market opened for trading on Tuesday the 28th with considerable fear. U.S. stocks had traded sharply lower overnight on the Tokyo, London, and world's other stock exchanges, but not low enough to make the tripping of the first circuit breaker a fait accompli. After an immediate decline of nearly 200 more points to clear out the so-called weak hands in the market-mostly traders receiving margin calls-the market abruptly reversed course. By the end of the day, it had rocketed up 334 points, recouping much of Monday's loss. Figure 1.1 shows the swiftness of both the decline and the subsequent recovery. Although few people felt the need to tag Tuesday with a name, Happy Tuesday was a common choice.

Despite making banner headlines in newspapers and magazines around the world, Blue Monday has become little more than a footnote to financial history. The great bull market of the 1990s stampeded back to life, with the Dow topping 10,000 in less than two years. Monday did set a record for the largest daily point decline in the Dow; however, viewed in relative terms, the 7.2 percent decline was only the...

Details zur Ausgabe

• Verlag: John Wiley &Sons
• Erscheinungsdatum: 2018
• Sprache: Englisch
• ISBN 10: 0471706256
• ISBN 13: 9780471706250
• Einband: Taschenbuch
• Auflage: 1
• Anzahl der Seiten: 338
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar