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[Recommended Book] Nobel Laureate Discusses 'Matching': School Choice, Kidney Transplants… The Allocation of Social Resources Is Never Simply 'Highest Bidder Wins'.

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Mr. Charlie Munger has a widely quoted saying: "In my whole life, I have never met a person who is truly wise yet does not read books. Not one. My children joke that I am just a book with two legs."

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【Recommended Book】Issue 305: 'Who Gets What—and Why: The New Economics of Matchmaking and Market Design'

[US] Alvin E. Roth, authored by Ye Xiaoyang and Lin Yining, translated by Ye Xiaoyang and Lin Yining

CITIC Publishing Group

Recommended by Marketing Editor Zhang Xiaomeng

October 2025

Interactive Topic:

Based on this book, please share your views on the principles of 'allocation of social resources.'

Comment period: October 22, 2024 – October 29, 2025

(Original content is encouraged. If your submission is of high quality, it may be selected multiple times.)

Screening and single-book delivery: After October 30, 2025

(If selected, you will receive a private message to submit your delivery address. Failure to submit the address or incomplete information by the deadline will be considered a forfeiture. During the participation period, please do not change your profile picture or nickname to avoid missing out on the opportunity.)

The allocation of social resources has never been based on the principle of 'the highest bidder wins.'

Author/CITIC Publishing. Excerpted from CITIC Publishing Group's "Match: Who Gets What—and Why"

Every year during the college entrance examination season, countless families are overwhelmed with anxiety over the submission of university applications. Although the past two decades have seen a shift in the admission process from 'sequential volunteering' to 'parallel volunteering,' issues such as major adjustments and falling short of admissions thresholds still persist.

Why does this happen? Because in the market for college admissions, the price mechanism has failed – the best universities are not necessarily the ones with the highest tuition fees, and the students admitted are not always those with the highest scores.

Looking across fields such as education, healthcare, and economics, not every market operates as the price-driven markets we are familiar with. Various industries exhibit 'matching' mechanisms that are not guided by price, as well as numerous instances of market failure.

For graduate school admissions at prestigious universities, there are limited spots available each year – who gets admitted? During the Spring Festival travel rush, hundreds of millions of people need to travel – who secures a ticket home? In job hunting, positions are in short supply – who gets hired? In kidney transplants, donors are scarce and matching is difficult – who receives a suitable kidney?

Alvin E. Roth, the 2012 Nobel laureate in Economics, has devoted his career to studying these 'invisible rules.' His research addresses clear yet profound questions: 'matching.' In other words, who gets what, and why? Only by thoroughly understanding the causes of market 'mismatches' can one effectively 'design' markets.

After winning the Nobel Prize, he decided to write an accessible book to explain what he studies and its significance. This resulted in 'Who Gets What – And Why: The New Economics of Matchmaking and Market Design.'

In the book, he describes various common instances of 'market failures' in American society, offering insights into the complexity of matching mechanisms – and how market design can restore functionality to chaotic and congested systems. Understanding these 'matching' rules also helps us understand how society truly operates.

I. Preventing Loss of Control: Why Do Financial Markets Settle Every Second?

Speed can make markets thrive, but it can also cause them to collapse. In a thick market, speed enables participants to quickly evaluate and process a vast number of potential transactions. However, when markets operate too quickly, their efficiency may decline.

Let us take the Chicago Mercantile Exchange and the New York Stock Exchange as examples.

Investors can invest in the 500 companies that constitute the S&P 500 Index, which serves as a key benchmark for measuring overall performance of the U.S. stock market. On the New York Stock Exchange, investors can easily gain exposure by purchasing an exchange-traded fund called SPY that tracks the S&P 500 Index. Meanwhile, on the Chicago Mercantile Exchange, investors can establish a similar position by purchasing the E-mini S&P 500 futures contract, known as ES.

The markets for SPY and ES are extremely deep and highly liquid. Millions of futures contracts and ETF shares are traded daily. At any given moment during trading hours, even within each minute, buyers can easily find sellers, and sellers can quickly find buyers, resulting in fierce competition.

However, when competition is compressed to the millisecond level, the rules of the market are rewritten.

A market that appears thick on a human timescale—with hundreds of trading opportunities occurring within a single second—may seem relatively thin to computers. Milliseconds pass without any trades occurring, and neither the highest bid nor the lowest ask prices change.

Equally important, news of price movements in Chicago takes a few milliseconds to reach traders in New York (SPY and ES prices rise and fall almost simultaneously). This delay allows someone to exploit the information lag by buying low in one market and selling high in another, thus generating arbitrage profits.

How fast must trades be to profit this way? Before 2010, transmitting market messages between Chicago and New York relied on cables laid along highways or railways. In 2010, a telecommunications provider invested hundreds of millions of dollars to lay a high-speed fiber optic cable. This new, straighter cable reduced round-trip transmission time for information and trade orders from 16 milliseconds to 13 milliseconds. This 3-millisecond difference meant that only traders using this new cable could capitalize on instantaneous price differences between Chicago and New York.

Since the electronic order book—a key element in financial market design—operates on a first-come, first-served basis, whoever places their order first gets it executed. The advantage of being faster translates into substantial profits.

Of course, the fact that faster traders can make more money isn't necessarily a problem in itself. However, presently, the increasing speed of connections has made the market function worse, even harming other traders' interests.

High-frequency trading exacerbates market instability. A well-known case is the 2010 U.S. stock market flash crash, where high-speed trading in ES futures and SPY ETFs was identified as one of the contributing factors. Within just four minutes, the prices of ES futures, related SPY funds, and numerous stocks in the index plummeted by several percentage points (an extraordinarily sharp move in the absence of major news), only to rebound just as swiftly.

Investigations revealed that the flash crash was triggered by trading among high-speed computer algorithms. The speed of these trades exceeded the capacity of human oversight, causing a brief loss of control with no intervention until significant volatility had already occurred.

In the aftermath of the flash crash, the market became even more chaotic, with backlogged orders and incorrectly timestamped records making it difficult to determine which trades were actually completed. Even some market computers lagged far behind the reaction speed of high-frequency traders.

Eric Budish, Peter Cramton, and John Shim proposed a straightforward reform for financial market mechanisms to address this growing crisis, restore price competition, and relieve traders from the need to race for information. They suggestedreplacing the 'first-come, first-served' continuous trading mechanism with one that executes trades only once per second.

Under the newly proposed market design, because only one trade is executed per second (a seemingly brief yet agonizing 1,000 milliseconds!), all bids will be aggregated within that second.

Trades will be executed at the price where supply and demand are balanced, facilitated by traders who submitted their bids at that price. In other words, priority in trading will no longer be given to the fastest traders but will instead be allocated to the highest bidder and the lowest asker.

In a market that trades only once per second, from a human time perspective, no one would have to wait long. Even economic news that could trigger price fluctuations can be delayed by one second without affecting market efficiency. This market mechanism would also simplify the tracking of transaction records, as ordinary computers currently available would suffice.

II. Thick but Congested: When School Choice Becomes a Traffic Jam Game

When it comes to speed, markets often follow a 'Goldilocks Principle': neither too fast nor too slow.

New York, with its large number of students and hundreds of schools, already has a thick admissions market, but one that is exceptionally congested.

At the time, New York City's high school choice system relied on a complex paper-based process. Students preparing for high school, with parental assistance, filled out forms listing up to five preferred schools in order of preference. Upon receiving the forms, the Department of Education sent each application to the respective schools listed, serving as the student’s application for admission.

Among these high schools, some admitted students through a lottery system, while others retained the discretion to decide on admissions or establish waitlists. After completing the admissions process, the Department of Education would send notices to students informing them of their results. If a student was accepted by multiple schools, the notice would request the student to choose one; if the student preferred a school that had not yet accepted them, they could opt to remain on that school’s waitlist.

The system also stipulates that students can accept at most one admission offer and one waitlist placement. For admissions declined by students in the first round, schools may issue new offers, followed by a second round of notification letters sent out by the Education Bureau. After students respond, the process moves into the third and final round of notifications and responses. Students who remain unmatched after the third round will be assigned by the Education Bureau, typically to the nearest school with available seats.

This complex system ultimately descended into chaos. Many students failed to secure admission to any of their applied schools, and by the time they were assigned through the system, it was often August, just weeks before the start of the school year. Additionally, many students bypassed the entire process altogether, gaining admission through informal channels amid confusion and congestion.

The reality is that the three-round admission process simply could not adequately assign seats in schools for 90,000 students.

At the same time, the system itself was highly congested, leaving no room for more than three rounds of admissions. In the first round, only about 50,000 students received admission offers, among whom approximately 17,000 received multiple offers and had to decide whether to accept or decline them before the second round began.

You can imagine how the operation of this system slowed down the entire process. Even if you were admitted to your first-choice school, promptly mailing back the confirmation letter might not be your top priority. You might celebrate for a day or two before replying to the Education Bureau. And if you weren’t admitted to your first choice, you might want to consult neighbors, friends, or teachers before deciding which waitlist to stay on, which also takes time. Thus, the problem isn’t just that traditional mail is slow; decision-making itself requires time. And throughout the entire admissions process, there are numerous people making decisions, each of which impacts the progress.

By the end of the third round, approximately 30,000 students remained unassigned by any school and were left to be allocated by the Education Bureau. Imagine: 30,000 children and their parents anxiously waiting under the summer heat as the crucial transition to high school approached, with clarity arriving only in the final sweltering days of summer.

Such an outcome is already discouraging, but congestion is not the only issue. For many parents, the entire system felt risky during participation—neither safe nor trustworthy.

Although there was an official appeal process and timely placements for students who moved or hadn’t been admitted by the start of the school year, savvy parents knew they could also make direct requests to principals.

Since schools were not required to disclose all available seats during the centralized admissions process, proactive parents fueled an active “gray market.” They circumvented this opaque—and potentially biased or corrupt—system to find alternative paths for securing school placements for their children.

"Joel realized that whether children could enter a particular school often depended on factors beyond application materials," said Tony Shorris, then Deputy Chancellor of Education. "Children with connections had an advantage."

Thirdly, when the price mechanism fails, who gets access to life-saving kidney sources?

So how should we design an effective market mechanism?

The market needs sufficient thickness, must overcome congestion, ensure participants can safely reveal their true preferences, and avoid premature collapse.

In recent years, people have begun to proactively design matching processes. As an emerging field in economics, market design introduces scientific methods to the study of matching and markets, which is precisely the subject of this book. Market design helps address issues that existing markets cannot resolve on their own, providing new insights into how “free markets” can truly achieve freedom and efficiency.

One highly successful example of market design is kidney transplantation.

Kidney transplants are a matter of life and death, yet the buying and selling of kidneys is illegal worldwide. Despite the high cost of transplantation, money does not determine who receives a kidney.

Given that the price mechanism has completely failed, how should we allocate such scarce and valuable resources? Under traditional systems, patients could only wait for compatible donors. Many patients die while waiting, leaving this market almost paralyzed.

When kidney resources are extremely scarce and unable to meet all demands, these limited resources must be allocated through some form of matching mechanism.

We proposed a system design involving paired donations and exchange chains. For example, if a relative of A is willing to donate a kidney but is incompatible with A, yet compatible with B, while a relative of B is compatible with A, then the two families can form a cycle. Through similar cycles or chains, more patients can receive treatment. Transplant systems in the United States and other countries have incorporated this mechanism into routine operations, saving tens of thousands of lives.

Why has kidney exchange been so successful? It is because it fulfills the necessary conditions for a good market mechanism.

First, it creates sufficient thickness. Originally, a single hospital could only match a small number of patients with donors, making the likelihood of a match very low. However, when patients and donors nationwide are brought into the same platform, the range of choices expands significantly, greatly increasing the chances of successful pairing.

Second, it avoids congestion. In the past, communication between patients and hospitals was fragmented, and each transplant team could only attempt to match individually, often resulting in repeated but fruitless coordination. The new system reduces redundancy and inefficient communication by centrally collecting preferences and medical information, allowing algorithms to find the optimal cycle.

Third, it ensures security. Patients and donors no longer need to worry about being disadvantaged. In a two-way or even multi-way exchange chain, every surgery must be conducted simultaneously to ensure all commitments are fulfilled. This institutional arrangement reduces the risks of betrayal and breach of contract, encouraging people to participate sincerely.

Finally, it prevents premature dissolution. In the absence of a unified mechanism, many hospitals and patients would hastily settle for suboptimal matches out of fear of missing opportunities. Within a nationwide matching system, however, transplantation can wait until more information is gathered and larger cycles are identified, leading to higher-quality outcomes.

Kidney exchange is one of the most representative success stories in market design. It demonstrates that even in the most extreme, sensitive, and scarce markets, where price mechanisms fail, solutions are not impossible; the key lies in how institutions are designed and how matching mechanisms are improved.

The functioning of markets and society has never been solely a result of supply and demand relationships but rather is maintained by countless invisible 'matching' mechanisms. Price is just one language of the market; more often, we rely on institutions and trust to make resource allocation fairer and more efficient.

Roth's 'matching economics' teaches us that markets are not naturally occurring but are instead designed. Understanding the 'matching' mechanism not only allows us to grasp the logic of resource allocation but also helps us rethink how to achieve true fairness and efficiency. This may well be the first step in understanding the complexity of modern society.

Contents Overview

Have you ever faced such dilemmas: despite having good grades, you failed to get into your dream school; despite decent qualifications, you repeatedly encountered disappointments in job hunting or dating; despite hard work, you always felt the results were disproportionate to your efforts? Behind these situations, it is often not merely a matter of ability or luck at play but an omnipresent yet frequently overlooked force—the matching mechanism.

Elvin E. Roth, Nobel laureate in Economics and one of the founding figures of the modern market design school, pointed out that resource allocation is not solely determined by prices but depends on an entire set of rules and institutions. Understanding these invisible mechanisms transforms you from a passive participant into a savvy player who comprehends the rules.

In this book, Roth uses vivid case studies to uncover the truth behind various 'mismatches' and demonstrates how institutional design can ensure resources are allocated appropriately. From choosing schools, careers, to life partners, from waiting in line for meals to finding parking spaces, this book will offer insights into the invisible rules that govern our lives.

This is not only a work of economics but also a guide to understanding how society operates. It tells us that economics is not a distant academic theory but a life science closely related to everyone's choices, fairness, and opportunities. By understanding it, you will learn to identify and seize opportunities that truly belong to you, making your life path clearer and more efficient.

Author Biography

Alvin E. Roth

Nobel laureate in Economics, member of the National Academy of Sciences, and fellow of the American Academy of Arts and Sciences. He has held positions at Harvard University and Stanford University and served as president of the American Economic Association. As one of the founders of the 'Market Design School,' he is regarded as a representative figure who has moved economics from abstract theory to practical applications.

Roth’s core contribution lies in the development of 'matching theory' and the creation of the entirely new field of 'market design.' He emphasizes that the allocation of many critical resources depends not only on price mechanisms but also on the proper arrangement of institutions and rules. His research provides economics with new methodologies, enabling the discipline to address real-world issues in education, healthcare, and public policy more directly.

This book is a landmark publication by Roth after receiving the Nobel Prize, written for a general audience. Since its release, it has garnered high acclaim from both the economics community and mainstream media, and is considered the most engaging and authoritative introductory text for the public to understand market design and contemporary economics.

Review of Previous Issues

Issue 304: From Instinctive Trading to Disciplined Trading

Issue 303: Humans Being Subjected to Reverse Turing Tests by Large Language Models

Issue 302: In Times of Market Volatility, Remember the 'Ten Commandments for Investors'

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