Introduction to Experimental
Economics
Rosemarie Nagel
Universitat Pompeu Fabra, ICREA, BGSE
BLEESS Summer School June 2012
What is an (economic) experiment
Strategic game:
Game theory
Clear theoretic solution
Choice experiment: no clear pre-theory
Non-induces preferences;
A very modern experiment: an auction example
Ebay-data created by ebay or by yourself
Or the survey I send to you!!!!!! Please do
it!!!!
Theodore Bergstrom and John H. Miller
“Taking a course in experimental
economics is a little like going to
dinner at a cannibal's house.
Sometimes you will be the diner,
sometimes you will be part of the
dinner, sometimes both” Quote from
“Experiments with Economic Principles”
Albert Einstein
The formulation of a problem is often more
essential than its solution which may be
merely a matter of mathematical or
experimental skill. To raise new questions,
new possibilities, to regard old questions
from a new angle, requires creative
imagination and marks real advance in
science.”
Einstein and Infeld, p. 92, The evolution of Physics, (1938)
Sources for experimental
economics
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Books and surveys (experimental economics-behavioral surveys):
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Collection of experimental facts: Davis&Holt (1992), Kagel & Roth (1995)
Experimental methods: Friedman & Sunder (1994),
Facts and models: Camerer (2003),
Behavioral economics: Camerer & Loewenstein (2005);
Field experiments: Harrison and List (JEL, 2005)
Neuro economics: Camerer, Loewenstein, and Prelec (JEL, 2005)
– Soon to come: Kagel & Roth second volume! (see already Al Roth
homepage)
• Especially Chapter by John Duffy on Macro economics
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Other sources
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Classroom experiments and webgames: Charles Holt (2006)
Web experiments: Rubinstein, Plott etc.
Field experiments: List’s webpage with papers
Critics about experimental economics: Al Roth
Working papers: Charles Holt
Micro text books with experimental economics
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Schotter (1996)
Bergstrom and Miller (1997)
Experimental Design Issues
see Friedman and Sunder (1994), Davis and Holt (1992)
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Incentives
simplicity of game and instructions (avoid formal, technical language)
how to phrase the problem, economic context etc., abstract wording vs. "real world"
wording
example, questionnaire, test of understanding
Pilot studies
Trial rounds,
Subject pools
Subject experience
within vs. between group effect
matching procedure of subjects (e.g. random vs same subjects)
number of periods, subjects
information given to subjects
controlling communication between subjects
asking for comments
no intentional deception of subjects
strategy method vs. choices
computer experiments vs. hand-run experiments
Anonymity between subjects vs face to face
Game theory,
Macro
Economic
Applied game theory
Psychological
questions
(espec.
questions
Field Data
IO), Micro
Individual
In general:
Decision making
Utility maximization
Auction
Equivalence
Industrial
Organization
Competitive
equilibrium
Asset
Markets
Phenomena of
stock market
in lab
Expected utility vs
non-expected utility
Behavioral
economics
Bargaining
Fairness vs
strategic
behavior
Lab as test bed for
new market design:
e.g: FCC-auctions
Field experiments:
Auctions of sports cards,
Newspaper experiments
External validity
Happiness
Psychology based
Neuro economics:
Descriptive models
e.g experiments with
patients with lesions,
use of brain scans while
being subject in
experiment
(high and low game theory)
Learning
Social utility function
Levels of reasoning
Quantal response eq.
Hyperbolic discounting
Behavioral finance etc
Public good
Free riding
??? what is missing
COMPLEX GAMES
Coordination
Multiplicity
Macro experiments
Experimental economics: topics
Why we do experiments
see also paper by Smith, 1992, and introduction of
handbook experimental economics 1995 by Roth;
introduction by Davis and Holt, 1992
“Speaking to theorists”
What is the theoretic solution and does behavior conform
with theory? (better use of theory: serves as benchmark)
– in the short run
– in the intermediate term (convergence)
– in the long run (convergence)
what are the causes of this failure:
– bounded rationality, other regarding preferences, coordination
failure, non expected utility, emotion, framing etc.
– Calculation costs; difficulty of task
– Also : bad design? => redesign of experiment
“Searching for facts”
• Establishing regularities - parsimonious models
that describe deviation from theory?
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non-expected utility models
models of fairness
models of adaptation and learning
models of reasoning (levels of reasoning), etc.
models with error
Note: model may or not be equilibrium model or have high
or low rationality
Having control over important features of the
environment and subjects
• what kind of information each subject has
about environment
• how many players participate
• the subject pool composition
• separation, isolation of problems, etc.
• Communication
• Responses
• Replicability
“Whispering in the ears of Princes”
Evaluation of policy proposal
• how to auction ‘runway rights’?
• FCC-auctions
• NASA: allocation access to space
laboratory
• pollution rights, etc.
• Matching problems (schools-students)
Comparisons of environments
• bargaining with one or more stages
• different information structures
• low number of players vs. high number of players,
etc.
Comparison of institutions, use the lab as a testbed for institutional design
• different auctions
• different mechanisms (e.g. for matching markets)
• different bargaining models, etc.
Possible Criticism of Experimental
Economics:
• wrong incentives (e.g. the stakes are too low)
• experts behave differently than students (the
usual subject pool); more heterogeneous subject
pool (different ages, educational background
etc)
• how can laboratory experiments help us decide
in the real world?
• having many repetitions is unrealistic
• some mechanisms don't exist in the real world
What is a good experiment?
(Al Roth)
• The answer depends on what you are testing or exploring, and who
you are talking to.
• Loosely speaking, a good experiment is one that controls for the
most plausible alternative hypotheses that might explain what is
being observed, and therefore allows you to distinguish among
them. But what are the most plausible alternative hypotheses may
depend on who you are talking to (which is why economists and
psychologists sometimes run rather different experiments
concerning roughly similar phenomena). The most plausible
alternative hypotheses may also depend on recent developments in
theory, in the laboratory (yours or someone else’s), or in the field. So
a “good experiment” is a creature of its time (and may even make
itself obsolete, as when it controls for a hypothesis which it
discredits, making those controls unnecessary in future
experiments).
How we start with an experiment
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Read surveys, major journals
Participate in experiments
Think of questions you have come up with during your studies
Formulate an economic question
– Specify the area (e. g. Labor, Macro, Marketing)
– What is an important question in a given field
– Use your (theoretic) model/paper from other classes
Use a nice game/situation/model (from class, literature)
Use a technique:
– Eg. Comparison of learning models, then search for game
Deviate from a given paper (add a new treatment)
Ask your supervisor
Know your limits
Guideline to prepare for your own experimental idea (adjusted from
Shyam Sunder, Yale University)
1. What is the question you would like to have answered after the experiment?
(Your answer should be a single sentence with a question mark at the end.)
2. What do you know already about the possible answers to the question you
have stated above?
3. What are the various possible ways of finding an answer to the question you
have stated above? Include both experimental as well as any other methods
you know about.
4. What are the advantages and disadvantages of using an experiment to find
an answer?
5. How important is this question to YOU? What are the chances that the
answer you get from the experiment will surprise you or others? What are
the chances that it will change someone’s mind?
6. How would you conduct the experiment? (Write down a design and
instructions.) 7. Is your experimental design the simplest possible design to
help answer the question you have stated?
7. What are the (possible) outcomes of the experiment? Do the experiment
with your class mates/students/friends. Do the (possible) outcomes include
at least one outcome that will answer the question you stated above? What
is the chance that you will observe this outcome? At any stage of your
thinking, feel free to go back and revise your earlier answers if you wish to.
8. COME AND TALK TO ME