Economists and those who study markets professionally see phenomena in market processes that many others have difficulty seeing. Economists often speak of the “invisible hand”, or “efficiency improving and wealth creating markets”. In markets they see a harmony of coordinated movements created by purposeful and reasonably informed decisions, guided by theoretical principles. On the other hand, to outsiders and nonprofessionals, prices appear to gyrate randomly, impulsively without purpose or direction or result from a decision by one person to opportunistically take advantage of another. They do not see the harmony reported by professionals and instead, see individual price movements and sudden jumps that have little or no relationship to each other.
This video is an attempt to bring the two perspectives together through a focus on an experimental market that reports individual motivations, decisions and prices as viewed from the operations of the system as a whole. The video has a broad perspective and attempts to capture the underlying principles that are invisible without adequate information and focus on key events.
The experiment uses real people, participating for real money in competition for three items offered in separate, ascending price auctions. A bidder can only win one item and items have different values that differ across people. Thus, the prices reflect a natural interdependence. The first video illustrates individual bidding in relation to personal values and the bids of others. The second video uses patented technology that allows you to hear the bidding. The dynamics, final prices and allocations are those predicted by general equilibrium market theory and supported by the Nash equilibrium from game theory. The videos allow the viewer to study and see the order that exists in the process and the underlying theory that guides it.
Hsing Yang Lee, Charles R. Plott, and Travis Maron, California Institute of Technology. September 2015.
The data are taken from Dae Hyun Kim, Hsing Yang Lee, Travis Maron, Charles R. Plott and Ruijie D. Teo, “Multiple Items, Ascending Price Auctions: An Experimental Examination of Alternative Auction Sequences”, California Institute of Technology, Social Science Working Paper #1406, April 18, 2015.