FJ: How did your electrical engineering background at CalTech help you top conduct Experimental Economics research in your late career? Overall do you think Economics is in engineering discipline or science discipline?

Prof. Vernon Smith (VS): When I was a senior at CalTech, I took an economics course and I got interested in the topic. I went to the library, it looked to me economics a lot like physics and engineering, which I was already doing. In general, the economics discipline was mathematical and had an important applied empirical dimension, which appealed to me. I then went on to the University of Kansas, where I received my master's degree. From there, I went to Harvard, where I did my Ph.D. So indeed it helps me a lot in conducting economics research with engineering mindset.

FJ: Are there any similarities between the following two: Experimental Economics versus Mathematical Economics, and Experimental Physics versus Theoretical Physics?

VS:
I should say there are a lot of similarities there in parallel. Especially in particle physics of Experimental Physics, people tend to do lab experiments in verifying those existing physics theories or predict new physics theories. Likewise Experimental Economics' relationship with Mathematical Economics is similar.

FJ: What are the fundamental challenges in economics research? Is that problem understanding and formulation? In your Nobel lecture, you mentioned human beings have difficulties on understanding and solving real world problems if using constructivist rationality only, why?

VS: I have to say there are lots of problems that we do not know how to deal with, such as market equilibrium problem. Maybe we should adopt total news approaches that we have never tried before. Economic theory is dominated by constructivist models, involving optimal knowledge for individuals, equilibrium in markets, and efficiency. But what we observe in experiments and the real world is often different: people's knowledge is incomplete, and they may not have any idea what it means to talk about equilibrium and supply and demand. Remarkably, though, the first time I got people together in the lab, the market they formed converged toward a competitive equilibrium. And I think that the history of experimental economics is, to some extent, the story of people achieving these outcomes that are unintended and unknown to them. This type of knowledge is what I call "ecological rationality." It may or may not correspond to the rational model that constructivism posits. We have examples where people don't do as well as rational models predict. We have examples where they do better. And we are trying to understand why. My Nobel lecture was sort of the beginning of that project (ecological rationality).

FJ: Experimental Economics studies economical problems by either conducting lab experiments or running computer simulation. How are abstraction and approximation be used in Experimental Economics to help formation of problems?

VS: I would say computer simulation is more used by mathematical economists to verify their theory instead of by experimental economists. As I mentioned before, due to ecological rationality, our abstraction and/or approximation of economical problems would be still incomplete despite how advanced your techniques are used. Mathematical economists tend to make more assumptions in tackling real world problems, while experimental economists could enjoy the luxury since they might use more realistic parameters during their lab experiments.

FJ: Scheduling, resource allocation and binding, those are fundamental problems in computer science, and some of them are known NP-complete, which are unsolvable in finite time. Now in Experimental Economics you pioneered, some problems such as airport runway scheduling problem, electricity adjustable pricing problem, etc. belong to scheduling and/or resource allocation and binding space, how is Experimental Economics related with computer science in that sense?

VS: In some sense they are related, and both computer science and Experimental Ecnomics are adopting approaches with different perspectives on tackling the same problems.

FJ: How does your political belief affect your Experimental Economics research, or vice versa?

VS: Not that much indeed. I think economists' work is still colored too much by their political preferences. As you know, I'm not a conservative or a liberal or a libertarian. It's important for economists to understand the phenomena they are studying before they start asking what can be done about it. And it seems to me that a lot of people are afraid of getting certain empirical results because of the implications it might have for the policies they favor. You see this in particular in the resistance to even the slightest suggestion that some of our behavior may have an inherited component. I tend to do the research, draw a conclusion, and then tie to a policy inclination, not vice versa.

FJ: Do you think, we as individuals, or as business, are being driven by the markets, or are driving the markets?

VS: This is a very good question. Let me phrase in this way: as the world becomes more globalized, the markets become more integrated, more inter-dependent, and the entry barriers to the markets are lower than ever before. For example, emerging countries like China could enjoy around 10% annual growth rate for more than 2 decades, that is unusual even in human history. In the old economy, typically the markets drove us since they are more powerful than us, whether as individuals or businesses. Now in new economy, things are totally different, the markets are now much well understood, and we might have both the will and the power to drive the markets instead of being driven by the markets. Of course, it is still under early stage for sure.

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