Dr. Vernon Smith, a professor of economics at George
Mason University as well as the director of the Interdisciplinary Center for
Economic Science (ICES) at GMU, was named 2002 winner of the Bank of Sweden
Prize in Economic Sciences in Memory of Alfred Nobel-the Nobel Prize in
Economics–for his research in economic bubbles and theories in experimental
economics.
After years of lab experiments and theoretical testing, Smith
discovered that the trading behavior of investors, and how they react to
economic predictions, are what drive stock market prices. "We are talking
about the nature of the market, and people are forecasting the
unforecastable and predicting inherent uncertainty," he says. The prices at
which investors end up buying stocks is usually higher than the price they
said they would accept, he explains. This then drives the price up until no
one is buying anymore, and the bubble bursts. His tests also demonstrated
that markets are more efficient with fewer participants.
We spoke with Smith about his theories and his presentation,
"Understanding Bubbles and Busts," that he will give at the TD Waterhouse
Institutional: Partnership 2003 National Conference, February 5-8 in Los
Angeles.
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