Economists are no longer simply describing and understanding markets, but are often playing the role of “economic engineer”, improving existing markets and sometimes, designing market mechanisms from scratch.
Al Roth is a professor of economics at Stanford University and the author of “Who Gets What ― and Why: The New Economics of Matchmaking and Market Design.” And although this book came out about seven years ago, it is still so, so fresh.
He and Greg talk about the growing field of market design, liquidity in modern day markets, game theory and stable matching.
Episode Quotes:
How speed & technology have changed trading & markets:
So right now a lot of trading engines are co-located with exchange servers in the same buildings, because the speed of light is bound on how fast you can find these trades. Majority of trades these days are algorithmic trades and they make very little money on each trade, but they make many, many trades.
And it's not clear that that's helping price discovery or efficiency, because people who are making markets or offering bids and asks, have to take wider spreads in order to defend themselves against having traded on a stale bid or ask when someone who's a little faster than they gets new information from one of the markets.
The growth of game theory & economics:
I think a little bit that's the way economics developed. For a long time we took markets as things that happened and our job was to study them. But one of the things you can study and particularly with the advent of game theory in the 20th century, one of the things you can study is the details of how markets work. What is their design? And once you start studying their design, you can start talking about maybe helping to alter it and fix it.
How Al got his start:
It turned out the future of game theory was in economics. And so my claim when I speak to [Operations Research] audiences these days is that I didn't change my field, I stood my ground and the disciplinary boundaries moved around me. So I'm an economist because game theory is about economics. But increasingly it's coming back to operations research because market design is about the operations of certain kinds of companies that run markets.
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