HSS 50th Anniversary Lecture
Credited as "the most influential figure in launching experiments as an empirical methodology in economics," Vernon Smith (Caltech, BS '49) was awarded the Nobel Prize in Economic Sciences in 2002. The decades-long tradition of experimentation in HSS can be traced back to the spring of 1974, when Smith, then a Sherman Fairchild Distinguished Scholar, and Charles Plott, now the William D. Hacker Professor of Economics and Political Science, co-taught a seminar that several Caltech social sciences faculty attended with the students. From that point on, experiments, including in political economy, would be central to teaching and research in HSS. Smith's research interests include capital theory, finance, and natural-resource economics. He was elected a member of the National Academy of Sciences in 1995 and received Caltech's Distinguished Alumni Award in 1996.
Science provides many examples in which the information gained from experiments fails to confirm widely held beliefs. Although beliefs eventually change, the process is commonly slow and resisted. This "confirmation bias" is surely good in that beliefs only change in response to stable and well-established evidence.
This lecture in honor of Caltech's 50th anniversary of the HSS Division 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. 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.
Note: If you're coming from off campus, please be aware that there will be a large Caltech event on Beckman Mall that evening. Please allow plenty of time to get to the lecture.