S4P Learns About Markets 

Who Gets What and Why: The New Economics of Matchmaking and Market Design
by Alvin Roth 

Book Summary

Alvin Roth is a Nobel-prize winning economist who helped structure crucial matching systems such as the national kidney exchange and the New York City public school system. In this book, he explains the history of marketplaces, how markets operate, and how markets succeed. He uses his experience building the matching system for the national kidney exchange, public school systems, and national residency clearinghouse to illustrate the factors that simplify market matches and keep them running smoothly. Roth’s book, rife with illustrations across industries, portrays markets as deeply human and fraught with human emotion. His insights help us understand the influences at play in various marketplaces.

Key Insights

  • Markets are human constructs with very human motivators. Roth spends a great deal of time showing the reader how human emotion can influence marketplaces. Although we tend to think about markets as abstract entities outside of our influence, social codes and morality often play a big role in how goods are offered and procured. 

  • Goods are priced based on how humans attribute value. In his experience helping to create the national kidney exchange, Roth was tasked with building a system that matches donors and applicants without any monetary exchange due to moral and ethical concerns around buying and selling human organs. Roth notes that Iran has a successful kidney exchange program that does in fact deal in the purchase of human kidneys and uses these opposite markets structures to display how human sentiment plays a major role in how markets operate. 

  • Eliminating fear from marketplace decisions helps ensure successful results for the majority. While creating an algorithm to match students to schools in New York City, Roth discovered that a system in which applicants could list their preferences honestly without fear of rejection from all options resulted in more preferable matches for the majority of applicants. 

Workflow Applications

  • Our clients are often motivated by very relatable feelings: One of our “foundational questions” at the beginning of every project that we try to answer as a team is, “What is success for the client?” Through this question, we’re really trying to put ourselves in the shoes of our client outside of the contracts and scopes we’ve drawn up to understand the motivating factors for our client and address the questions they need answered. Understanding that markets are human constructs often heavily affected by human motivations helps us better empathize with our clients and provide them with a thorough and insightful product. 

  • Markets may look different than what we expect: Something great about our team at S4P is that some of us come from backgrounds outside of the finance or economics realm. For many of us, Roth’s book revealed marketplaces as very different in structure and operation than we had previously thought. This insight helps us approach new projects with a richer understanding of markets and how to approach them. 

  • Understanding value proposition is essential to creating a good product: Roth shows us how the perceived value of a product can significantly alter how a market operates. In our “foundational questions” exercise at the beginning of every project, we try to determine as a team the value proposition of a product or service. These value propositions should stay present as we tackle our diligence workflows to ensure our deliverables reflect the motivators in the marketplace. 

Discussion Questions

  • Talk about the relationship between markets and human emotions, morality, and social codes. Does this change the way you think about markets? How so?

  • What are your thoughts on Roth’s concluding chapters around signaling, repugnance, and free markets? Should these be included in this book? 

  • How do Roth’s opinions on markets and match systems influence the way you think about your role?

  • There appeared to be a lot of complaints about this book on social reading sites, especially around Roth’s attitude towards his own accomplishments and his insistence around his theory being the only correct option. What are your thoughts on this? Do you agree or disagree?

Memorable Quotes From The Book

  • “Making markets safe is one of the oldest problems of market design, going back to well before the invention of agriculture, when hunters traded the ax heads and arrowheads that archaeologists today find thousands of miles from where they were made. More recently, one of the responsibilities of kings in medieval Europe was to provide safe passage to and from markets and fairs. For healthy commerce, buyers and sellers needed to be able to participate in these markets safely, without being waylaid and robbed (or worse) by highwaymen. Indeed, the word waylay captures the act of robbing travelers carrying money or valuables on their way to or from a market. Without some assurance of safe passage, these markets would have failed; they would have been too risky to attract many participants. And if the markets had failed, the kingdoms would have been deprived of the prosperity that markets, and the taxes on them, bring.”

  • “Turning a market into a commodity market helps make it really thick, because any buyer can buy from any seller, and any seller can sell to any buyer.”

  • “Part of making a market thick involves finding a time at which lots of people will participate at the same time. But gaming the system when the system is “first come, first served” can mean contriving to be earlier than your competitors. That’s why, for example, the recruitment of college freshmen to join fraternities and sororities is called “rush.” Back in the late 1800s, fraternities were mostly social clubs for college seniors. But in an effort to get a little ahead of their competitors in recruiting, some started “rushing” to recruit earlier and earlier. Fast-forward to today, when it is first-semester students who are the targets of fraternity and sorority rush.”

  • “Building a better mousetrap isn’t always rewarded when the mice have a say in the matter”

Additional Resources