Manhattan Rare Book Company

A fascinating and deep collection of milestone papers in finance and economics, with a strong emphasis on Nobel Prize winning work.

Contained in 21 boxed items, with most boxes containing several works. Most items are in their original wrappers in excellent condition; please inquire for full condition description.

The boxed groupings included:

1. Landmark Theories of Decision Making (Nobels 1978 and 2002): "Exposition of a New Theory on the Measurement of Risk" by Daniel Bernoulli (Econometrica 22 No. 1 pp. 23 - 36, January 1954); “An Essay towards solving a problem in the doctrine of chances” By Thomas Bayes (Biometrika 45, 1958); "Le comportement de l’homme rationnel devant le risque: critique des postulats et axiomes de l’école Américaine" by Maurice Allais (Econometrica 21 No. 4 pp. 503 - 546, October 1953); "A behavioral model of rational choice” by Herbert A. Simon (Quarterly Journal of Economics 69, 1955); “Rational choice and the structure of the environment” Herbert A. Simon (Psychological Review 63, 1956); and "Prospect Theory: An Analysis of Decision under Risk" by Daniel Kahneman and Amos Tversky (Econometrica 47 No. 2 pp. 263 - 292, March 1979).

Landmark papers on decision making: (1) Expected Utility: First English translation of of Daniel Bernoulli's 1738 paper introducing "expected utility theory." (2) Bayes' Theorem: Reprint of Bayes' 1763 paper that describes the most comprehensive early theory of decision-making. (3) The Allis Paradox: This paper by Nobel Laureate Maurice Allis found that many decisions do not agree with the predictions of expected utility theory, indicating the need for other theories. (4) Bounded Rationality: Two papers by Nobel Laureate Herbert Simon proposing how decision making varies from the ideal because of "real world" constraints like information availability, cognitive power, and time. (5) Prospect Theory: Nobel Lauerates Kahneman and Tversky explain non utility-maximizing decisions by noting (and determining the implications of) the fact that people are more sensitive to losses than gains and to how an outcome differs from a reference level such as the status quo than to an absolute outcome.

2. Ramsey Optimal Growth Model: "A Mathematical Theory of Saving” (Economic Journal 38 No. 152 pp. 543 – 559, December 1928).

Frank Ramsay, who died prior to his 27th birthday, made 3 landmark contributions to economics. One (this paper) was his famous "optimal growth" model - which has since become known as the "Ramsey model" - one of the earliest applications of the calculus of variations to economics. Samuelson called it "A strategically beautiful application of the calculus of variations." In it Ramsey determined the optimal amount an economy should invest (save) rather than consume so as to maximize utility, or in Ramsey’s words: "How much of its income should a nation save?"

3. Theory of Rational Expectations (Nobel 1995): "The Predictability of Social Events" by Emile Grunberg & Franco Modigliani (Journal of Political Economy 62 No. 6, December 1954); “Rational Expectations and the Theory of Price Movements” by John F. Muth (Econometrica 29 No. 3, July 1961); and "Expectations and the Neutrality of Money" (Journal of Economic Theory 4 No. 2 pp.103 - 124, April 1972).

"Rational expectations" is the economic theory describing how predictions of events influence behavior. For example, the expected level of inflation influences negotiations between workers and their employers, and the value of a share of stock is driven by expectations of future income from that stock. Rational expectations theory is the basis for the efficient market hypothesis. Grunberg and Modigliani provided the intellectual underpinnings for the rational expectations theory in their 1954 paper. In his 1961 paper, John Muth named the theory of rational expectations and proposed how to model it. In 1972, Robert Lucas published his major investigation into the implications of rational expectations. Lucas was awarded the 1995 Nobel Memorial Prize in Economic Science "for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy".

4. Life Cycle Hypothesis of Saving and Consumption (Nobel 1985): “Utility analysis and the consumption function: an interpretation of cross-section data” by Franco Modigliani and Richard H. Brumberg (Post-Keynesian Economics pp. 388–436) and “The ‘life-cycle’ hypothesis of saving: aggregate implications and tests” by Albert Ando and Franco Modigliani (American Economic Review 53 No.1, pp. , March 1963).

Franco Modigliani, with Richard Brumberg and Albert Ando, formulated the Life-cycle Theory of Saving and Consumption This theory predicts that that savings rate depends on the age of consumers, and hence on the demographic structure of society. This theory replaced Keynes's 'fundamental psychological law' of saving, according to which the marginal and average propensities to save grow as income rises. Modigliani was awarded the 1985 Nobel Memorial Prize in Economics "for his pioneering analyses of saving and of financial markets" (these two papers plus a later paper with Merton Miller also in this collection).

5. Congestion Pricing (Nobel 1996): “A proposal for revising New York's subway fare structure” (Operations Research 3 No. 1 pp. 38 - 68, February 1955).

Nobel Laureate William Vickrey (Economics, 1996) is considered to be the father of congestion pricing, as he first proposed it for the New York City Subway system in 1952. Congestion pricing is the use of pricing mechanisms to reduce usage during periods of peak demand. It has been widely used by telephone and electric utilities, metros, railways and autobus services, and is being proposed for highways. This is the first published account of Vickrey's proposal.

6. Modigliani - Miller Theorem: Value, Capital Structure and Dividend Policy (Nobel 1985 and 1990). “The Cost of Capital, Corporate Finance and the Theory of Investment” By Merton Miller (American Economic Review 48 No. 3 pp. 261-297, 1958); "Dividend Policy, Growth, and the Valuation of Shares" By Franco Modigliani and Merton Miller (The Journal of Business 34 No. 4, October 1961); and "The Modigliani-Miller Propositions after Thirty Years" by Franco Modigliani (Journal of Economic Perspectives 2 No. 4 pp. 99-120, 1989).

This work, also known as the "Modigliani-Miller Theorem," demonstrates that a firm's market value is independent of its capital structure and dividend policy. The 1958 dealt with capital structure, the 1961 paper extended the theory to dividend policy, and the 1989 paper describes the impact of this work. Modigliani was awarded the Nobel Memorial Prize in Economic Sciences in 1985 and Miller in 1990, with both awards recognizing this work.

7. Theory of the Economics of Information (Nobel 1982): “The economics of information” (Journal of Political Economy 69 No. 3 213 – 225, June 1961); and “Information in the labor market” (Journal of Political Economy 70 No. 5 Part II pp. 94 – 105, October 1962).

George Stigler was awarded the 1982 Nobel Memorial Prize in Economic Science "for his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation" in which his theory of information and search (these papers) figured prominently. The theory of perfect competition implies a single price for goods or resources of homogeneous quality, but in reality large variances are the norm because of the difficulty and cost of obtaining information. As a result, market equilibrium will be characterized by a distribution of prices (or wages) whose variance is related to the cost of searching for information. Note: the second issue included here also contains an important early paper by Nobel Laureate Gary S. Becker, titled "Investment in Human Capital: A Theoretical Analysis."

8. Auction Theory (Nobel 1996): "Counterspeculation, auctions, and competitive sealed tenders” by William Vickrey (Journal of Finance 16 No. 1 pp. 8 - 31, March 1961) and "A Theory of Auctions and Competitive Bidding" by Paul Milgrom and Robert Weber (Econometrica 50 No. 5 pp. 1089 - 1112, September 1982).

Vickrey's paper was the first to use game theory to explain the dynamics of auctions and derive auction equilibria. His revenue equivalence theorem remains the centrepiece of modern auction theory. Vickrey was awarded the 1996 Nobel Memorial Prize in Economics for his "fundamental contributions to the economic theory of incentives under asymmetric information" (the auction paper). Milgrom and Weber's paper further advances auction theory by describing a "general symmetric model" of auctions that does not assume that the values of the bidders are symmetric as did Vickrey. They are able to demonstrate that auction types rank differently in their ability to generate high prices depending on assumptions of how individual bidders differ with respect to values, risk aversion and the like. The FCC used this information to pick an English auction for its very successful spectrum auctions in the 1990s.

9. Experimentation in Economic Analysis (Nobel 2002): “An experimental study of competitive market behavior” (Journal of Political Economy 70 No. 2 pp. 111-137, April 1962).

Pioneering paper on controlled experimentation in economics. Smith was awarded the Nobel Memorial Prize in Economic Sciences in 2002 "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms" (this paper).

10. Capital Asset Pricing Model (Nobel 1990): "Capital asset prices. A theory of market equilibrium under conditions of risk" by William F. Sharpe (Journal of Finance 19 issue 3 pp. 425 - 442, September 1964); "The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets" by John Lintner (Review of Economics and Statistics 47 No. 1 pp. 13-27, February 1965); “Security Prices, Risk, and Maximal Gains from Diversification” by John Lintner (Journal of Finance 20 No. 4 pp. 587 - 615, December 1965) "Equilibrium in a Capital Asset Market" by Jan Mossin (Econometrica 34 No. 4, pp. 768-783, October 1966); "Risk, Return and Equilibrium. Some Clarifying Comments" by Eugene Fama (Journal of Finance 23 No. 1 pp. 29 - 40, March 1968).

The capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, given that asset's non-diversifiable risk (also known as systematic risk or market risk). The model takes into account the asset's sensitivity to non-diversifiable risk, often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset. The first four papers developed CAPM and the paper by Eugene Fama resolves the apparent conflicts between Lintner and Sharpe's measures of risk. The only other major work on CAPM (by Jack L. Traynor) was not published until 1990, and then only as part of a textbook on the topic. Sharpe shared the Nobel Memorial Prize in Economic Sciences in 1990 for his paper.

11. The Efficient Market Hypothesis: "The Behavior of Stock Market Prices" (Journal of Business 38 No. 1, January 1965); "Random Walks in Stock Market Prices” (Financial Analysts Journal 21, September-October 1965); and "Efficient Capital Markets. A Review of Theory and Empirical Work" (Journal of Finance 25 No. 2, May 1970).

The Efficient-Market hypothesis asserts that financial markets are "informationally efficient," or that prices on traded assets (e.g., stocks, bonds, or property) already reflect all known information, and instantly change to reflect new information. According to this theory, it is impossible to consistently outperform the market by using any information that the market already knows, except through luck. The efficient-market hypothesis was developed by Professor Eugene Fama at the University of Chicago through his published Ph.D. thesis and follow on work. This offering contains the thesis, a simplified explanation of the thesis published shortly thereafter, and further development of the hypothesis specifying multiple levels of efficiency.

12. First Evidence in Support of Index Funds: "The Performance of Mutual Funds in the Period 1945-1965" Journal of Finance 23 No. 2 pp. 389 - 416, May 1968).

This is the first analysis to show that managed mutual funds perform less well than a "buy the market and hold" strategy. This finding led to the creation of index funds.

13. The Effect of Information on Stock Prices: “The Adjustment of Stock Prices to New Information” (International Economic Review 10 No. 1 pp. 1 - 21, February 1969).

First study of the impact of new information on stock prices. The paper also introduced the analytical methodology now called "event analysis" or "event-time analysis" that has become the standard for measuring the impact of new information on stock prices. "..The single most important break-through in our understanding of how stock prices react to new information." (Joel Stern)

14. The Investment Portfolio Problem: “Lifetime Portfolio Selection under Uncertainty: the Continuous-Time Case” (Review of Economics and Statistics 51 no. 3, pp. 247-257, August 1969).

Robert Merton (Nobel Memorial Prize in Economic Sciences 1997) formulated and solved the investment strategy problem faced by an individual who has to decide how much to consume, how much to invest and how to allocate the investments between stocks and risk-free assets so as to maximize expected lifetime utility. Note: The issue also contains "Lifetime Portfolio Selection by Dynamic Stochastic Programming" by Paul A. Samuelson (pp. 239-246).

15. Information Assymetry (Nobel 2001): "The Market for Lemons: Quality Uncertainty and the Market Mechanism" (Quarterly Journal of Economics 84 pp. 488 – 500, August 1970).

First paper to address the problem of "information asymmetry" that occurs when the seller knows more about a product than the buyer. This paper is one of the most-cited papers in modern economic theory (more than 5,800 citations as of July 2009) Akerlof shared the 2001 Nobel Memorial Prize in Economic Sciences "for his research related to asymmetric information" (this paper).

16. The Black-Scholes Option Pricing Model (Nobel 1997): “The Pricing of Options and Corporate Liabilities” by Fischer Black and Myron Scholes (Journal of Political Economy 81, 1973) and “Theory of Rational Option Pricing” by Robert C. Merton (Bell Journal of Economics and Management Science 4, 1973).

Modern option pricing techniques are the most mathematically complex of all applied areas of finance. Most of the models and techniques employeed by today's analysts are rooted in the "Black-Scholes option pricing model" developed by Fischer Black, Myron Scholes and Robert Merton in 1973. Scholes and Merton shared the 1997 Nobel Memorial Prize in Economic Sciences for this work. Fischer Black had passed away before the award and so was not eligible.

17. Arbitrage Pricing Theory: “The Arbitrage Theory of Capital Asset Pricing” (Journal of Economic Theory 13 No. 3 pp. 341 – 360, December 1976) and "An empirical investigation of the arbitrage pricing theory" (Journal of Finance 35 No. 3 pp. 1073 - 1103, December 1980).

The Arbitrage Pricing Theory (APT), is the most influential alternative to CAPM. The APT differs from the CAPM in that it is less restrictive in its assumptions. It allows for an explanatory (as opposed to statistical) model of asset returns. It assumes that each investor will hold a unique portfolio with its own particular array of betas, as opposed to the identical "market portfolio." the APT can be viewed as a "supply-side" model, since its beta coefficients reflect the sensitivity of the underlying asset to economic factors. In contrast, CAPM, is a "demand side" model. Its results, although similar to those of the APT, arise from a maximization of each investor's utility function (investors are considered to be the "consumers" of the assets). The first paper by Stephen Ross introduces APT and the second paper by Ross and Richard Roll evaluates the theory.

18. Economic Theory of Human Behavior (Nobel 1992): "Investment in Human Capital: A Theoretical Analysis" (Journal of Political Economy 70 No. 5, Part 2 Supplement pp. 9-49. October 1962); "A Theory of the Allocation of Time" (The Economic Journal 75 No. 299 pp. 493- 517, September 1965); “Crime and Punishment: An Economic Approach“ (Journal of Political Economy 76 Issue 2 pp. 169 - 217, March-April 1968); "On the Interaction between the Quantity and Quality of Children" (Journal of Political Economy 81 No. 2 Part II pp. S279 - S288, March-April 1973); "A Theory of Marriage: Part I" (Journal of Political Economy 81 No. 4 pp. 813 - 846, July-August 1973); "A theory of Marriage: Part II" (Journal of Political Economy 82 No. 2 Part II pp. S11 - S26, March-April 1974); "A Theory of Social Interactions" (Journal of Political Economy 82 issue 6 pp. 1063–1093, 1974); and "An Economic Analysis of Marital Instability" (Journal of Political Economy 85 No 6 pp. 1141 - 1187, December 1977).

Gary Becker was awarded the 1992 Nobel Memorial Prize in Economics "for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including nonmarket behaviour." According to the Nobel committee: "Gary Becker has carried out an even more radical extension of the applicability of economic theory in his analysis of relations among individuals outside of the market system." "Instead of an analysis in terms of the traditional dichotomy between work and leisure, Becker's model provides a general theory for the household's allocation of time, as exemplified in the essay, A Theory of the Allocation of Time, from 1965." "The most notable example is his analysis of the functions of the family." Becker's influence on the economics of the family has been pervasive and his approach to studying the family is now widely accepted not only by economists but also by family sociologists, demographers, and others.

19. Theory of Correlation (Nobel 2003): "Co-Integration and Error Correction: Representation, Estimation and Testing" (Econometrica 55 No. 2 pp. 251 - 276, March 1987).

This is the landmark paper on co-integration, now called "cointegration," the property that allows analysts to test whether there is a statistically significant connection between apparently related time series such as a stock market index and the price of its associated futures contract. Granger and Engle were awarded 2003 Nobel Memorial Prize in Economic Science "for methods of analyzing economic time series with time-varying volatility" and "for methods of analyzing economic time series with common trends (co-integration)".

20. Three Factor Model: "The Cross-Section of Expected Stock Returns" (Journal of Finance 47 No. 2 pp. 427 - 465, June 1992) and "Common Risk Factors in the Returns on Stocks and Bonds" (Journal of Financial Economics 33 No. 1 pp. 3 - 56, February 1993).

These two papers introduce and develop the Fama-French Three Factor Model of market behavior, an improvement over CAPM, a model that uses only one factor, beta. The Three Factor Model explains over 90% of the diversified portfolios returns, compared with the average 80% given by CAPM.

21. Theories of Market Failure: “The Limits of Arbitrage” by Andrei Schleifer and Robert W. Vishny (The Journal of Finance 52 No. 1 pp. 35 - 55, March 1997) and "Credit Cycles" by Nobuhiro Kiyotaki and John Moore (Journal of Political Economy 105 No. 2 pp. 211 - 248, April 1997).

These are two very important papers that warned of the types of market failure that contributed to the great recession of 2008. The efficient market hypothesis assumes that whenever mispricing of a publicly-traded stock occurs, an opportuntity for low-risk profit is created for arbitrage, and the mispricing will disappear quickly. "The Limits of Arbitrage" describes the results of a model that shows that arbitrage breaks down under extreme circumstances, leaving prices in a non-equilibrium state for protracted periods of time. The second paper, "Credit Cycles" is the first paper to describe the second-order effects to the economy that can occur as a result of credit shocks. .

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