Vernon Smith
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Nobel Prize-winning experimental economist
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Claims by Vernon Smith (20 of 23)
Macroeconomic Instability Comes From Re-tradeable Goods
Non-durable consumer goods (about 75% of private product) cannot be re-traded and behave stably both in the lab and the economy, while all macroeconomic instability comes from the other 25%, mostly durable, re-tradeable assets like housing.
Max U Works for Perishable Supply-Demand Markets
The maximizing-utility (Max U) model works well in ordinary supply-and-demand markets for perishable, non-re-tradeable commodities (like hamburgers and haircuts) because participants have fixed buyer/seller roles, property rights are perfectly enforced, and goods cannot be re-traded, reducing dependence on trust.
Trust Game Cooperation Falsifies Max U
In the anonymous one-shot trust game, Max U predicts the first mover stops the game for the safe equilibrium payoff, yet about half of first movers pass, and two-thirds to three-quarters of second movers reciprocate cooperatively rather than defecting and taking all the money, falsifying the self-interest prediction even with extreme payoffs.
Switching Buyer/Seller Roles Drives Price Instability
In markets where participants can switch between being a buyer or a seller depending on price (like stock or housing markets), prices become unstable and erratic, unlike role-specialized markets such as haircuts where one is always a buyer.
Supply-Demand Convergence With Few Participants
Contrary to the belief that competitive convergence requires complete information and a large 'sea' of buyers and sellers, experimental supply-and-demand markets converge to competitive equilibrium easily even with very small numbers of participants.
Choice Is Governed by Social Criteria, Not Utility
Although Adam Smith assumes self-love (non-satiation) as a stoic axiom, he holds that actual decisions are governed by social criteria -- the desire for praise and praiseworthiness and the avoidance of blame and blameworthiness -- so one can tell a complete story of human interaction without invoking a utility function at all.
Intentions Determine the Meaning of Actions
Adam Smith's framework explains trust-game cooperation by holding that intentions are central to the meaning of actions: a beneficent action from proper motives merits reward, and observers can infer proper motives because they can see what the actor could have done but chose not to, making actions readable signals of intention -- something the Max U common-knowledge-of-self-interest model has no room for.
There Is No Self Without a We
Human psychology is fundamentally social: using Adam Smith's mirror metaphor, an individual raised in total isolation could no more grasp a deformity of his own mind than of his own face; society provides the looking-glass through which we see ourselves as others see us, so there is no self without a 'we'.
Experiments With Endowments Need Replication With Earned Money
Because subjects behave differently with experimenter-provided endowments versus money they earned, earlier experiments using endowed 'experimental money' need to be replicated with earned money to test their robustness -- a methodological correction now underway.
Resentment of Hurtful Intent Grounds Property Rights
Adam Smith's proposition that hurtful actions from improper (intended) motives alone deserve punishment generates resentment, and these small-group rules of resentment-driven, proportional punishment are later carried over into civil law -- so law and property rights originate in cultural moral sentiments long before government codifies them.
Theft Punished More Than Breach of Contract
Adam Smith explains that theft and robbery carry greater punishment (and are criminal offenses) than violations of promises or contracts (which are only civil offenses) because robbery takes what we have already acquired while breach of contract merely frustrates our expectation of gain -- an application of the gains/losses asymmetry.
Seeing Foregone Options Doubles Cooperation
In a controlled comparison, when the second mover can see that the first mover voluntarily gave up an outside option, cooperation is twice as high as defection; but when the first mover had no choice (no outside option to forgo), defection becomes twice as high as cooperation -- demonstrating that the ability to read intention drives reciprocal cooperation.
Find Motivation Before Judging Efficiency
Economists reduce everything to utility maximization mainly so they can make efficiency statements, but Adam Smith would say there is time enough for efficiency judgments later; first one should find out on the ground why people actually do what they do -- their immediate motivations and emotions.
Trade Generates Prices, Comparison, and Specialization
In Adam Smith's account the propensity to truck, barter, and exchange comes first and drives everything: trade produces prices (spread by gossip if not public), prices enable calculation and comparison that prompt new questions, and this process transforms people and creates specialization -- reversing the neoclassical view in which preferences, technology, and resources are primitive and specialization is presupposed.
Neoclassical Tools Earned Markets in Electric Power
The traditional mathematical and auction-theory framework is genuinely valuable for engineering applications: Smith and Rassenti used it to design experiments showing skeptics that competitive wholesale markets for electric power could work, helping Australia move from state-owned power to a national wholesale electricity market by 1998.
Smith Anticipated Prospect Theory's Loss Aversion
Adam Smith stated and used the asymmetry between gains and losses -- that we suffer more falling from a better to a worse state than we gain rising from worse to better, across fortune, reputation, and esteem -- anticipating the loss-aversion asymmetry that Kahneman and Tversky later documented in individual decision-making.
Asset Markets Produce Bubbles Even When Transparent
Even transparent experimental asset markets with a known common dividend produce price bubbles, as people get caught up in self-reinforcing expectations of rising prices; these bubbles diminish with trader experience, paralleling real-world housing bubbles like the one behind the Great Recession.
Rules of Conduct Are Culturally Specific
Norms of propriety are culturally and locally specific: the Korean hotel staff graciously declined a tip not because they preferred less money but because, in their cultural rule system, excellent service was their duty rather than a beneficent act above the call of duty, illustrating that conduct -- not utility maximization -- governs behavior and that both parties' apparent 'irrationality' dissolves once propriety is understood.
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