1. Some people argue that China is currently experiencing a bubble, especially in real estate.

If you agree,
what possible problems might you encounter in trying to trade on your opinion?
2. In the article “Famous First Bubbles” the author goes to great lengths to argue that we must exhaust all
rational explanations of fluctuations in asset prices before resorting to irrationality. In another well known
article, it was claimed that the valuations of internet and fiber optic stocks in 99-00 could be justified with
sufficiently high asset sigmas. What do you think of this argument?
3. Economic theory predicts that markets clear on price. This means that supply is equal to demand in
equilibrium. If new information arrives about asset values, demand and supply should change
simultaneously to arrive at the new price. This implies a more or less constant level of “inventory”, or
assets on the market waiting for buyers. Why, then do we tend to see lower inventories in rising markets
and higher inventories in falling markets?

San Francisco Home Inventory

4. In New York City, the bed bug detection business is growing rapidly due to an increase in bed bugs and
awareness about bed bugs. The most effective way to detect bed bugs is with specially trained dogs that
bark excitedly when they smell the droppings of the bedbugs. They receive rigorous training that involves
rewards for successful identification. These dogs can detect bedbugs with accuracy that varies but is often
greater than 90%. Recently however, there have been numerous complaints by customers who have spent
thousands of dollars fumigating their homes and discarding furniture and bedding after a dog registered a
finding of bedbugs. Subsequent follow ups failed to find the creatures. Some of these skeptical customers
are suing the detection companies on the grounds that their dogs are not properly trained. Can you foresee
a difficulty that these plaintiffs might encounter with their lawsuits?
5. Every Spring teams in the National Football League participate in their draft of college players. Each team
is assigned a series of draft picks determined by their win/loss record the previous season. Teams will
frequently trade draft picks. In determining the rate of exchange for these picks, most teams refer to a
common draft value chart which assigns points to each position in the draft. This chart can be found here:
http://sports.espn.go.com/nfl/draft06/news/story?id=2410670

To test whether or not teams using this chart are mispricing draft picks, two economics professors
compared the prices implied by actual trades with those predicted by the chart and came up with the
following table:

Can you conclude that the chart provides a good pricing model to use in trades going forward? In other
words are the draft picks properly priced?

6. In June of 2000, the Millenium Bridge was opened to the public. This bridge, designed by Norman Foster
was considered to be one of the most intriguing designs of the year due to its elegantly thin construction.
However, almost immediately, the bridge began to sway in a way that made those on the bridge concerned
about its stability. The architects were puzzled: they had a model that incorporated what they knew about
average human weight, maximum weight load, and the mechanics of individual walking. They knew that
humans are not identical, so they randomized the human walking motion in their models in accordance with
the distribution of individual walking characteristics found in nature. What did they overlook and what
insight does this offer for financial markets?