Vernon L. Smith

Vernon L. Smith
Nobel Laureate
Chapman University · Economic Science Institute (ESI)

Caltech (BSEE, 1949); University of Kansas (MA, Economics, 1951); Harvard (PhD, Economics, 1955)

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473
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Publications

Publications (473)
Preprint
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We investigate the problem of constructing a gas pipeline that is to be shared initially by several incumbent firms. The paper concerns the first phase of a study of the use of alternative auction procedures for building and awarding capacity rights to a pipeline joint venture in accordance with individual bidders' willingness to pay the initial fi...
Chapter
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Although various typologies of goods are commonly adopted in economics, one stood out in market experiment results contrasting market stability and efficiency with market instability: non-durable, or perishable, goods versus durable re-tradable assets. This dichotomy of goods also proved central for understanding macroeconomic instability more broa...
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In retrospect, the experimental findings on competitive market behavior called for a revival of the old, classical, view of competition as a collective higgling and bargaining process (as opposed to price-taking behaviors) founded on reservation prices (in place of the utility function). In this paper, we specialize the classical methodology to dea...
Article
Neoclassical price theory was founded on axioms of price-taking behavior and the law of one price in a market, axioms inconsistent with a theory of endogenous price discovery in markets. Classical economists including Adam Smith narrated a price discovery process based on buyer and seller reservation values and their motivation to buy low and sell...
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We offer an information theory of market price formation, formalizing and elaborating on an old, implicit, classical tradition of supply and demand based on buyers’ and sellers’ monetary valuations of commodities (formally their reservation prices) and competition as a multilateral higgling and bargaining process. The early laboratory market experi...
Article
We take a refreshing new look at boundedly rational quadratic models in economics using some elementary modeling of the principles put forward in the book Humanomics by Vernon L. Smith and Bart J. Wilson. A simple model is introduced built on the fundamental Humanomics principles of gratitude/resentment felt and the corresponding action responses o...
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We take a refreshing new look at boundedly rational quadratic models in economics using some elementary modeling of the principles put forward in the book Humanomics by Vernon L. Smith and Bart J. Wilson. A simple model is introduced built on the fundamental Humanomics principles of gratitude/resentment felt and the corresponding action responses o...
Article
"This evaluation begins with the BDM protocol—itself a methodological contribution—and the experimental findings. The question of the replicability and robustness of these unexpected results is addressed next in a summary of two subsequent experimental papers. We follow with a discussion of two attempts to explain qua understand the BDM findings; b...
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"The 1870s marginal revolution in economics culminated a century later in a failure. The core utility maximization principle of this school of thought was shown to have no interesting implication for aggregate market behavior in general (Sonnenschein, 1972, 1973a, 1973b; Debreu, 1974; Mantel, 1974; Kirman, 1989; Shafer & Sonnenschein, 1993; Rizvi,...
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This paper introduces and formalizes the classical view on supply and demand, which, we argue, has an integrity independent and distinct from the neoclassical theory. Demand and supply, before the marginal revolution , are defined not by an unobservable criterion such as a utility function , but by an observable monetary variable, the reservation p...
Preprint
This paper introduces and formalizes the classical view on supply and demand, which, we argue, has an integrity independent and distinct from the neoclassical theory. Demand and supply, before the marginal revolution, are defined not by an unobservable criterion such as a utility function, but by an observable monetary variable, the reservation pri...
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The relevance of Adam Smith for understanding human morality and sociality is generally accepted; witness the growing interest that his work is stimulating among scholars of various academic backgrounds (philosophers, political theorists, sociologists, economists). But, paradoxically, Adam Smith’s theory of economic value enjoys a less prominent st...
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Journal summary: "Economists miss the boat when they act as if Arrow and Debreu’s general equilibrium model accurately describes markets in the real world of constant change. In contrast, the classical view on the market mechanism offers a helpful foundation on which to add modern insights about how markets create and coordinate information."
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For classical economists, markets served the highest value buyers without anyone in the market needing to know that it was possible to write aggregate buyer reservation prices in the form, D = F (p). Cournot, thereby launched neoclassical economics as modelling and thinking of economic action in terms of their outcome effects, rather than their roo...
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"We argue that neoclassical value theory suffers from a more basic and serious logical indeterminacy, which is inherent in the axiom of price-taking behavior, and which renders price dynamics indeterminate before inquiring as to its stability. If everyone in the economy takes price as given, whence come these prices? Who is giving these prices? Jev...
Book
Cambridge Core - History of Ideas and Intellectual History - Humanomics - by Vernon L. Smith
Preprint
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In this paper I want to begin with the neoclassical supply and demand model of markets (SDM), whose static equilibrium consequences predicted outcomes far more accurately than were anticipated in laboratory experimental tests of the theory actuated by Jevons (1862, 1871; Smith, 1962). The observed predictive accuracy of SDM was not anticipated beca...
Article
This paper develops a model of buyer (consumer) and seller (advertiser) strategic behavior in sponsored search auctions. Through its various extensions, the model is able to predict the effect of different ranking and payment policies on auction performance in terms of consumer surplus as well as advertisers’ and search engine profits. The theoreti...
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Full-text available
"In this paper I want to begin with the neoclassical supply and demand model of markets (SDM), whose static equilibrium consequences predicted outcomes far more accurately than were anticipated in laboratory experimental tests of the theory actuated by Jevons (1862, 1871; Smith, 1962). The observed predictive accuracy of SDM was not anticipated bec...
Article
Full-text available
Here we report the results of an experiment that tests the reciprocal risk reduction ¹ and 'tolerated theft' or taking hypotheses ² for why the human species is unique in having extensive exchange of resources among non-kin. We designed an experiment to determine whether, in response to variance of resource acquisition, people exchange food resourc...
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In this essay, I want to illustrate the power of Sentiments to bring order to contemporary experiments where the traditional game-theoretic models failed decisively to predict human action even under the conditions of anonymity. Sentiments is about sympathy, an undefined primitive human characteristic known and identified through the work it does i...
Article
An exceptionally robust result in experimental economics is the failure to observe equilibrium (subgame perfect) play in the ultimatum game. A heretofore unnoticed feature of the game is that neither player voluntarily chooses to play. Motivated by Adam Smith's proposition that beneficence—like that of non-equilibrium play in the ultimatum game—can...
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Let me introduce Em Weiler, Purdue department head, then Dean, School of Industrial Management. He hired the first wave, 1954–1956, managed it with finesse, integrity, and turned quality standards over to his faculty. Meet John Hughes, economic historian, the brother I never had; Stan Reiter, best economist I ever knew; mathematical economist par e...
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In 1967, Joyce and I moved to Sherborn Massachusetts where she began her Unitarian ministry. It was an adventure for us all, with Joyce ultimately making her mark as a leading figure in that ministry. We would settle in as New Englanders, part of the community, much different from our experience when I was a Harvard graduate student. We loved Sherb...
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At age 12, I entered the workforce unimpeded by child labor laws and minimum wages. I was the third breadwinner in the family. My father worked full time. My mother baked cakes and pies that she sold to restaurants. In addition, I worked for the West Side Drug store delivering to customers on my bicycle, much as Amazon and UBER are starting today t...
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On the Arlington campus of George Mason University, our experimental program had a productive seven-year run. The proximity of Federal agencies and departments led to many new experimental explorations, some with policy implications. In 2007, Daniele Struppa, the dean that had hired us at GMU, reappeared to see if he could interest us in Chapman Un...
Chapter
“And it must follow, as night the a day, thou canst not then be false to any man.” When we separate from that wisdom, we suffer. This chapter is largely about the brain, the mind, mental-izing, and the diversity of these characteristics in people and its importance in human betterment. We each vitally depend on the knowledge of others, from whom we...
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Fortunately for my family, in 1934 my father resumed his job in Wichita about the same time that the bank foreclosed on our farm. The gain would exceed the loss, even for me, for I now had playmates, and we still had our ever-reliable felines, Lady and Mandy, and Glory, my faithful terrier. I was just turning seven. If I had stayed on the farm, Mr...
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Having survived and thrived at Caltech, then earning an MA in economics at KU, Harvard was easy. I had trail-blazing teachers of the day—Leontief, Haberler, Orcutt, Hanson, Samuelson who taught down-river to MIT. At Harvard, I placed among the top 2–3 graduate students. My entry scores at Harvard were good enough, but not outstanding, proving what...
Chapter
After a year at the Center for Advanced Study in the Behavioral Sciences, I return to Caltech as a Fairchild visiting scholar, reenergized for new lab experiment studies. Charlie Plott and I will teach the first experimental seminar at Caltech, and that will launch their exceptional contributions to the development of experimental political economy...
Chapter
Unsustainable expansion followed by a devastating collapse in the US economy helped to stimulate important new research revisiting the original supply and demand commodity-flow experiments at Purdue. The motivation came from the large subsequent literature on assets market experiments showing the robust tendency for inexperienced subjects to genera...
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The most important economic story I have to tell is my Camelot years at Purdue. They were pioneering years, created day by day from our experience and from pooling our increasing knowledge. Out of this process emerged new theory, applications, quantitative methods, cliometrics, and experimental economics. I report the circumstances of my first expe...
Chapter
Abruptly though not unexpectedly my father was laid off from his work in 1932 as the Depression of 1929 deepened beyond all hope of an early bounce-back. When Grover was killed, my mother had received a railroad life insurance payment that my parents invested in a 160-acre farm about 45 miles southeast of Wichita near Milan Kansas. I became a farm...
Book
This sequel to A Life of Experimental Economics, Volume I, continues the intimate history of Vernon Smith’s personal and professional maturation after a dozen years at Purdue. The scene now shifts to twenty-six transformative years at the University of Arizona, then to George Mason University, and his recognition by the Nobel Prize Committee in 200...
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My father died unexpectedly, a year before I finished at Harvard. My mother followed him only two years after I settled into Purdue for a career they had made possible. I was only just getting to know them as people, not parents. I took it in stride because they taught me that life was for living, not crying. But their passing left scars of sadness...
Chapter
Our move to Chapman coincided with the start of the Great Recession. In the run-up, we had experienced a debt-financed housing expansion not seen since the 1920s, but much larger and potentially more damaging than the Depression. While the Federal Reserve intervened massively and cushioned the decline, it erred badly in rescuing investors from the...
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I want to take you through the house that I came home to, after being my mother’s first child born in a hospital. I knew that house, its every nook and cranny. It was a treasure house in memory proving that ninety odd years later you can go home again.
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I was a C+ student in high school, but no less resolved to go to college. Where to go? No one in my family could help. A book I found stated that the best college in the USA was Caltech. So, I decided to go to Caltech. No pretense here, only an incredible dose of naiveté and ignorance. To be accepted you had to perform on three 3-hour examinations...
Chapter
In 2001, five of us left Arizona for new opportunities to continue our work at George Mason University. A year later, we are settled into our new research and teaching home. On October 9, I received word from Stockholm that I was recognized by the Nobel Foundation “for having established laboratory experiments as a tool in empirical economic analys...
Book
This book provides an intimate history of Nobel Laureate Vernon Smith’s early life, combining elements of biography, history, economics and philosophy to show how crucial incidents early in his life provided the necessary framework for his research into experimental economics. Smith takes the reader from his family roots on the railroads and oil fi...
Chapter
My father’s family worked in the oil (petroleum) industry, almost from its beginning in 1859. His father left the Pennsylvania oil fields for Tulsa, then Riverton, El Dorado, and finally settled in Wichita. My father, however, will abandon his father’s roughneck life portrayed faithfully by Jack Nicholson in Five Easy Pieces. After serving in World...
Chapter
Family and personal life experiences appear throughout the chapters, as context requires it. This chapter is about close friends at different times in my maturation, about wives, children, each unique, special, and inseparable from my personal transitions. My generation has passed, but friends and family include many whose dedication has kept me yo...
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When I began to talk, I went through a period when I called myself “my.” I recount here events important in my life and family before I was born: events that influenced and inspired my outlook, maturation, and eventually a life of discovery. This chapter fixes childhood—mine, but metaphorically a state of childlike curiosity—as a prominent theme th...
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My religious roots were in 1930s Unitarian humanism, very much in the strong historical Jesus tradition of the times. Coinciding with our move to the Chapman community Candace and I experienced an awakening of our long-dormant interest in exploring the Judeo-Christian foundations of faith. Our extensive reading included the history of the first thr...
Chapter
Quite distinct from the two kinds of markets studied in laboratory and field was the large experimental literature on two-person extensive form games, particularly, “trust” and “ultimatum” games demonstrating the massive failure of self-interested utility maximizing choice to predict and enable understanding of the highly replicable findings in the...
Chapter
Arriving in Tucson amidst the summer monsoon wind, rain, and lightning, I enroll a small assorted and assertive mix of undergraduate and graduate students ranging from engineering to economics to see what we can learn together from the pursuit of new projects to be defined in-process. I put them through a few of the standard “hand-run” experiments...
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I was privileged to meet John many years ago at one of the many game theory conferences held at the State University of New York, Stony Brook. On this occasion, I was in the hotel breakfast room. I had finished breakfast, and I recognized John Nash sitting at a table, also alone, in the corner. I was heading to the day's first conference presentati...
Chapter
Traditionally the economics profession has long been identified with the sole proprietor model of research, publication, and education. The history of economic thought shows that economics was written by lone contributors from classical to neo-classical economics, and into the twentieth century. Graduate students of Smith have read vintage articles...
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In his first book Adam Smith used the metaphor of the fair and impartial spectator to articulate his model of the maturation process whereby people learn to follow general rules (norms) that take into account the human sentiments of gratitude and resentment in others. Through the impartial spectator, human action is governed by self-command. I will...
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Adam Smith’s metaphor of the impartial spectator is an essential element in understanding his model of the maturation process whereby people learn to follow general rules that honor the human sentiments of gratitude and resentment in others. Through the impartial spectator human action, subject to error, is governed by self-command. Smith’s model i...
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"Better drugs that arrive sooner and at a lower cost is the appropriate goal of the Food and Drug Administration’s (FDA) system for regulating new therapeutic drugs. That goal is not being achieved as seen in sky-high prescription drug prices, more than a decade for clinical trials and related FDA decision processes, and a concomitant lack of fast-...
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Prior studies have shown that traders quickly converge to the price-quantity equilibrium in markets for goods that are immediately consumed, but they produce speculative price bubbles in resalable asset markets. We present a stock-flow model of durable assets in which the existing stock of assets is subject to depreciation and producers may produce...
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I argue that the authors accept too casually the neo-classical framework of thought that was incapable of predicting choices in 2-person and other experimental games in the 1980s and 1990ss. The ex post hoc hypothesis that social preference can describe homo socialis reduces inevitably to a rescue of neo-classical economics in which Max-U (own payo...
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These edited remarks explore the relationship of the thought of F.A. Hayek to the development of experimental economics and related programs in economic design. Particularly emphasized are the insights of Hayek with respect to competition and their importance to the theoretical justification for, and empirical results derived from, the experimental...
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This paper supports the effort by Hindriks and Guala (2014) to integrate the prevailing accounts of institutions. I illustrate with traffic narratives how we can think of their concept of rules-in-equilibrium as evolving from universal elementary forms. These conceptions resonate fully with Smith (1759) who saw rule-following conduct as the basis o...
Chapter
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Similarities between the financial crisis in September 2008 and the collapse of the financial system during the depression have been widely noted. Yet the comparability of the origins and transmission of the crises have been neglected. The recent downturn, which originated with a pronounced housing boom and collapse, led to severe household balance...
Article
The first supply and demand experiments in the 1950s converged more strongly and quickly than people thought likely. Equally surprising, the first asset market experiments in the 1980s converged far less strongly and rapidly than expected. The economic crisis in 2008 brought a re-thinking of these old discoveries, motivated new experimental exercis...
Article
We construct an asset market in a finite horizon overlapping-generations environment. Subjects are tested for comprehension of their fundamental value exchange environment and then reminded during each of 25 periods of the environment's declining new value. We observe price bubbles forming when new generations enter the market with additional liqui...
Chapter
The Great Recession has a simple explanation: with abandon people widely violated the basic rules of what Adam Smith would have called ‘propriety’ in his first and much neglected book, The Theory of Moral Sentiments (1759 [1982]). The rule violations were stated crisply in Shakespeare’s maxim in Hamlet: Neither a borrower nor a lender be; For loan...
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“Why return to Adam Smith?” Because we learn that he had fresh-for-today insights, derived from a modeling perspective that was never part of economic analysis. Smith wrote two classics: The Theory of Moral Sentiments (1759; hereafter Sentiments); and An Inquiry into the Nature and Causes of the Wealth of Nations (1776; hereafter Wealth). In Sentim...
Article
We design an experiment to examine behavior and welfare in a multi-level trust game representing a pass through investment in an intermediated market. In a repeated game, an investor invests via an intermediary who lends to a borrower. A pre-experiment one-shot version of the game serves as a baseline and to type each subject. We alter the transpar...
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Full-text available
Balance sheet crises, in which the prices of widely held and highly leveraged assets collapse, pose distinctive economic challenges. An understanding of their causes and consequences is only recently developing, and there is no agreement at all on effective policy responses. A preliminary purpose of this article is to examine in detail the events t...
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Laboratory experiments provide an underutilized methodology for subjecting research in logistics and supply chain management to rigorous scientific scrutiny. As discussed in this paper, by following established procedures researchers can create an economic system in which behavior can be observed and replicated. With the ability to control the inst...
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Our primary purpose in this article is to draw upon the literature of classical liberal economy to show how it informs and is informed by the results from experimental economics. Adam Smith's first great book, The Theory of Moral Sentiments, serves as our chief source of insights for understanding and interpreting modern laboratory research in term...
Article
We design an experiment to examine behavior and welfare in a multi-level trust game representing a pass through investment in an intermediated market. In a repeated game, an investor invests via an intermediary who lends to a borrower. A pre-experiment one-shot version of the game serves as a baseline and to type each subject. We alter the transpar...
Article
Full-text available
Science has outgrown the “modern mistake” of discounting invisible realities. Houston Smith, The Soul of Christianity (2005: 41) Introduction: What Is Faith? Faith in invisible realities, once considered the exclusive province of religion, has pervaded physics since Newton, has created a counterintuitive new reality since Einstein, and was at the c...
Article
Full-text available
Balance sheet crises, in which the prices of widely held and highly leveraged assets collapse, pose distinctive economic challenges. An understanding of their causes and consequences is only recently developing, and there is no agreement on effective policy responses. From backgrounds in experimental economics, Steven Gjerstad and Nobel laureate Ve...
Article
This chapter focuses looks at the effects of littering and how it factors into the pricing system.

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Projects (9)
Project
Human exchange likely evolved among ancient hominids as a survival strategy under conditions characterized by resource holding asymmetries and asynchronous opportunities to control resource distribution (Kaplan et al. 2012). These conditions required that successful exchange relationships rely on trust and trustworthiness (Cosmides and Tooby 1992; Isaac 1978). Relationships in modern economies continue to share in the gains and efficient transactions possible from trust-based asynchronous exchange: by relying on trust, the otherwise necessary costs of contracting and monitoring can be reduced or eliminated (e.g., Fukuyama 1995). We study the conditions that facilitate trust extension and the behavioral propensity to trust others.
Project
A mathematical theory of market price formation (competitive market price discovery) rooted in the realistic tradition of the classical economists and in experimental findings on market behavior. The classical paradigm is based on acute observation of the economy and the principle that economic regularities, rather than being implications of artificially idealized utility-maximizing individual rationality, are instead emergent properties of simple, ordinary, market behaviors and interactions. A special theme in this rehabilitation of classical economics is the characterization of the market mechanism as an emergent informational optimization in a way that echoes Hayek’s hypothesis (the view that a market price system synthesizes a large amount of information dispersed throughout the economy).