Lecturer: Peter Bossaerts
Department: Economics
Level: Undergraduate
Summary: This class introduces students to general equilibrium theory, which should be understood as “the theory of how markets behave and interact and what the consequences are for the quality (efficiency) of ensuing allocations.”: Applications in finance are focused on, which means that students will gain insight into widely used concepts such as alphas and betas, prediction markets, subprime loans, or derivative deltas. Unlike any other class in general equilibrium theory, the focus is on economics as a science. Indeed, rather than just presenting theories and musing how they could shed light on the historical record of markets in the field (“the real world,” as economists would say), the class engages in a dialogue between theory and controlled experiments. The study of the design of the experiments should allow students to better grasp the precise empirical content of the theory, such as: what do economic agents need to know for the theory to work? This also aids in reflecting on how the theory applies to field markets. There, hard to measure factors – and possibly yet unrecognized forces – confound, just like friction makes it impossible to readily verify, on naturally falling objects, whether acceleration caused by gravity is constant. We will add some novel topics such as the impact of computational complexity on equilibrium existence.