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Affluent Christian Investor | August 23, 2017

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My Research On How to Prevent Bubbles

First Time Bubble (Photo by Serge Melki) (CC BY) (Resized/Cropped)

” This new research can’t prevent the mass contagions that lead to bubbles.”

Yes, but Lab experiments have provided guidelines that establish how to PREVENT BUBBLES: Stop or slow the flow of new money into the bubbling market!

We implemented the test in the lab by declaring a dividend yield on the asset after each trading period close, but NOT, as in the baseline protocols, paying it as cash into individual accounts & thus available for buying; rather we withheld payment unt…il the end of each experiment. Big bubbles in baseline; none in the treatment. A second treatment that paid half the cash dividend immediately into the accounts, gave us smaller bubbles than in baseline.

Vernon L. Smith, M. Van Boening and C. Wellford, 2000 “Dividend Timing and Behavior in Laboratory Asset Markets,” with Economic Theory, 16 (3) pp. 567-583.

How would that work in housing markets? Reduce the flow of new mortgage credit into the market; e.g., raise down payments. See S. Gjerstand and V. L. Smtih, RETHINKING HOUSING BUBBLES (Cambridge, 2014)

The bottom line is that you simply reduce the fuel that is enabling of the phenomena reported in Neuron.

So, interventionists, don’t do heavy-handed things to individuals, just cut down on their fuel!

 

Originally published on JasonZweig.com.

Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments with the Argyros School of Business & Economics and the School of Law, and he is part of a team that will create and run the new Economic Science Institute at Chapman.

Dr. Smith has authored or co-authored more than 250 articles and books on capital theory, finance, natural resource economics and experimental economics. He serves or has served on the board of editors of the American Economic Review, The Cato Journal, Journal of Economic Behavior and Organization, the Journal of Risk and Uncertainty, Science, Economic Theory, Economic Design, Games and Economic Behavior, and the Journal of Economic Methodology. He is past president of the Public Choice Society, the Economic Science Association, the Western Economic Association and the Association for Private Enterprise Education. Previous faculty appointments include the University of Arizona, Purdue University, Brown University, the University of Massachusetts, and George Mason University, where he was a Professor of Economics and Law prior to joining the faculty at Chapman University. Dr. Smith has been a Ford Foundation Fellow, Fellow of the Center for Advanced Study in the Behavioral Sciences and a Sherman Fairchild Distinguished Scholar at the California Institute of Technology.

In 1991, the Cambridge University Press published Dr. Smith’s Papers in Experimental Economics, and in 2000, a second collection of more recent papers, Bargaining and Market Behavior. Cambridge published his Rationality in Economics: Constructivist and Ecological Forms in January 2008. Dr. Smith has received an honorary Doctor of Management degree from Purdue University, and is a Fellow of the Econometric Society, the American Association for the Advancement of Science, and the American Academy of Arts and Sciences.

Dr. Smith is a distinguished fellow of the American Economic Association, an Andersen Consulting Professor of the Year, and the 1995 Adam Smith Award recipient conferred by the Association for Private Enterprise Education. He was elected a member of the National Academy of Sciences in 1995, and received CalTech’s distinguished alumni award in 1996. He has served as a consultant on the privatization of electric power in Australia and New Zealand and participated in numerous private and public discussions of energy deregulation in the United States. In 1997 he served as a Blue Ribbon Panel Member, National Electric Reliability Council.

Dr. Smith completed his undergraduate degree in electrical engineering at the California Institute of Technology, his master’s degree in economics at the University of Kansas, and his Ph.D. in economics at Harvard University.

 

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