Behavioural Economics & Experimental Methods
Dr Anwar Shah
School of Economics, QAU
Introduction of Experimental
Economics
Main Books:
1.Markets, Games, and Strategic Behavior By
Charles A. Holt
2.Nudge: Improving decisions about health, wealth
and Happiness by Richard H. Thaler and Cass R.
Sunstein (Published by Yale University Press)
3.Experimental Methods: A Primer for Economists
by Daniel Friedman and Shyam Sunder (1994)
Behavioural Economics & Experimental Methods
(Dr Anwar Shah, QAU)
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What is “Experimental Economics”
• Experimental Economics is a branch of
Economics that uses controlled experiments
– To evaluate Theories and Behavioral assumptions
– To test policies and their implementation.
• Controlled experiments are a method of
empirical investigation
Behavioural Economics & Experimental Methods
(Dr Anwar Shah, QAU)
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Why use experiments?
• 1. To make inferences about theory, which
otherwise is hard to examine.
– Most theories cannot be tested directly with field
(happenstance) data such as whether people are
rationale, whether invisible hand theory holds,
whether people free ride etc.,
• 2. To examine and study topics for which no
information is available.
– Do people prefer equality over efficiency?
– Do people compare themselves with others?
Behavioural Economics & Experimental Methods
(Dr Anwar Shah, QAU)
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Experimental Methodology
• What is experimental methodology and how
controlled experiments are used in economics
• How controlled experiments offer an
alternative way of analyzing economic
theories and problems
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(Dr Anwar Shah, QAU)
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Why Data
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Types of Data
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Types of Data
• Happenstance data: the by-product of
uncontrolled naturally occurring economic
activity
• Experimental data: Generated for scientific
purposes in a controlled environment
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Types of Data
• Solely on the basis of field data, it is difficult to
decide whether and when a theory fails, and
to pinpoint the aspects responsible for this
failure”. - Bank of Sweden (2002)
• Nevertheless, laboratory experiments have
recently been accepted by mainstream
economics…
Behavioural Economics & Experimental Methods
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Types of Data and Experiments
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Types of Data and Experiments
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Data and Experiments
• Experimental
economics
uses
controlled
experiments (primarily in the laboratory)
• Laboratory experiments is a (“new”) method for
studying human behavior, theories, institutions in
a simplified environment that mimics situations
that are encountered in markets and other
economic interactions.
– New since Chamberlin (1948)
– Simplified to ensure control and causality
• Experiments are also conducted in the field, over
the internet and in brain scanners.
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Advantages and Disadvantages
• Advantages:
– Easy to interpret due to control
– Focus on the topics of interest
– Sometimes can be a way to save money! (e.g. policy
experiments, auction experiments)
• Disadvantages
– Cost
– External Validity
• Happenstance field data has advantages and
disadvantages, reversed
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Advantages: Control
• Experimenter can distinguish between exogenous and
endogenous variables
• Experimenter controls information conditions
• Experimenter controls (to some extent) incentives by
paying money
• There are few unobservable variables
– Causality is not a problem as experimenter can implement
ceteris paribus condition
– As a result, sophisticated econometrics are not necessary
and fewer observations are required
• Experimenter controls the conditions under which data
is generated
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Advantages: Control
• A case of how lack of control can lead to misleading
results
• Question:
• Do employment and training programs increase
(mean) annual earnings of participants?
• Randomized field experiment: Participants and nonparticipants chosen randomly
• This ensures experimental control by avoiding selection
bias (assuming sample is large enough)
• By using simple statistics and comparing the two
groups La Londe (1986, AER) showed that the course
increased earnings by $900 on average.
Behavioural Economics & Experimental Methods
(Dr Anwar Shah, QAU)
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Advantages: Control
• Then, he ignored control group and assumed
that he had happenstance field data.
• He used various econometric specifications to
estimate impact of course on earnings
• The estimates varied considerably and in
some cases had the opposite sign!
• See also Cox and Oaxaca (1991)
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Purpose of Experiments
• Scientific purposes
–
–
–
–
Study theoretical predictions
Study underlying assumptions
Compare competing theories
Offer advice to theory (e.g. which of the different
equilibria predicted by theory will occur)
– Show the way forward to theory (e.g. does gender
matter as all economic theories are gender neutral?
(highlight the importance of institutions such as
markets and auctions?)
– Measure individual characteristics (e.g. risk attitudes,
fairness attitudes)
Behavioural Economics & Experimental Methods
(Dr Anwar Shah, QAU)
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Purpose of Experiments
• Other purposes
– To influence decision/policy making
– To understand behavior of consumers, voters and
managers.
– Educational purposes (learning objectives)
Behavioural Economics & Experimental Methods
(Dr Anwar Shah, QAU)
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Difference from Psychology
• There is partial overlap of research interest as both are
social sciences, but both have some different interests:
• economists care for economically relevant situations.
• Methodological differences:
–
–
–
–
–
–
economists despise deception (lying)
economists dislike hypothetical questions
economists reward each decision (salience)
economists use written instructions
economists use repeated trials and less one-shot trials
different relation to existing theory
• But experimental economists are learning from
psychologists and vice versa.
Behavioural Economics & Experimental Methods
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Some Objections
• Experiments are unrealistic
– So are economic models!
• Simplicity is often a virtue
• Whether realism is important depends on the
purpose of the experiment:
• If the purpose of study is to test a theory
• Then the evidence is important for theory
building but not for a direct understanding of
reality.
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Some objections
• Experiments are artificial, because of
– subject pool bias (students)
– low stakes
– Small number of participants
– Inexperienced subjects
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Answers of the Objections
• Most criticisms can actually be answered by conducting
more experiments!
• Use other subjects (e.g. Fehr et al., JLE 1998: soldiers;
Cooper et al. AER 1999: managers; Fehr/List, 2006,
JEEA: CEOs)
• Increase the stake level (e.g. Holt/Laury, AER 2002;
Cameron, JRU 1999)
• Increase the number of participants, (e.g . Isaac and
Walker J Pub E 1990; and Walker, J.Pub.E 1990;
Bellemare/Kröger2003)
• Recruit experienced participants (e.g. Kagel/Levin, AER
1986)
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Summary
• Experimental economics is a relatively new
field in economics, which use controlled
laboratory experiments for the purpose of
scientific knowledge.
• Experiments economics provides new tool for
the collection of data in social sciences, which
otherwise was difficult to collect. Such
collection of data help us to test theories,
assumptions of theories and suggest polices.
Behavioural Economics & Experimental Methods
(Dr Anwar Shah, QAU)
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Thanks &
Allah Hafiz
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Appendix
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