ECON 282: Introduction to
Experimental Economics
Professor Graeme Walker
office: WMC 2696
office hours: 3:00-4:00 (Monday)
or by appointment
email: gmw1@sfu.ca
“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.”
– Bergstrom and Miller
Brief Introduction
 If you take a laboratory course in the physical sciences, you get to
mix smelly chemicals, or monkey with pulleys, or dissect a frog, but
you are always the experimenter and never the subject of the
experiment. In the market experiments conducted in this class, you
and your classmates will be the participants in the markets as well
as the scientific observers who try to understand the results.
 It is hard to imagine that a chemist can put herself in the place of a
hydrogen molecule. A biologist who studies animal behavior is not
likely to know what it feels like to be a duck. You are more fortunate.
You are studying the behavior and interactions of people in
economically interesting situations. And as one of these interacting
economic agents, you will be able to experience the problems faced
by such an agent first hand. We suspect that you will learn nearly as
much about economic principles from your experience as a
participant as you will from your analysis as an observer.
– Bergstrom and Miller
Course Outline
 The goal of this course is to learn about the
experimental methodology, as well as some of
the analysis tools needed to evaluate the
outcomes of experiments
 In doing this, you will be exposed to a wide
range of topics in economics including:
1.
2.
3.
4.
5.
6.
Markets and market design
Game theory
Econometrics
Social economics (e.g. identity, learning, networks)
Crime and Punishment
Development Economics
Course Outline
 This is not an exhaustive list of topics, but is
meant to you a bit of an idea as to what to
expect in 300- and 400-level course that focus
solely on one of these areas.
 Incomplete lecture slides will be available on the
course webpage
You should print these out before coming to the
lecture (try printing 4 slides to a page
 Pre-requisites are ECON 103 and ECON 105,
so it is assumed that students have a basic
understanding of economics.
Grading
1.
Participation



There will be 4 experimental sessions run in tutorials
Attendance will be taken
The full participation grade will be given randomly for one of the
experimental sessions


2.
3.
If you know you cannot make it to one of the tutorials, come see me
during my office hours
30%
Tentatively set for June 27th
Final Exam

20%
There will be 2 assignments of equal weight
Assignments will involve data analysis
You can work in groups of up to 3 members
Midterm

4.
This forces you to come to all experimental sessions
Assignments



10%
August 13th
40%
Course Schedule
Date
Lecture
May 9 Introduction
Tutorial
NO TUTORIALS
May 16 Experimental Design
NO TUTORIALS
May 23 NO CLASSES
Experiment #1: Markets
May 30 Data Analysis: Qualitative
NO TUTORIALS
June 6 Data Analysis: Quantitative
Experiment #2: Public Good
June 13 Markets
How to use excel, Sample questions
June 20 Public Goods
ASS#1 due
June 27 MIDTERM
NO TUTORIALS
July 4 Game Theory
Experiment #3: Ultimatum
July 11 Social Preferences
Experiment #4: Crime
July 18 Social ID
Sample questions
July 25 Crime
ASS #2 due
August 1 NO CLASSES
NO TUTORIALS
August 8 Development
NO TUTORIALS
Textbooks
Textbooks are recommended not required
There will be a number of papers covered
in lectures…the relevant parts should be
read
I will post what is relevant and from which
article
Now it’s Time for our
Experiment!
st
1
Experimental Instructions
 Players:
– 1 and 2
 Actions:
– each player chooses whether to attend a hockey game or the ballet
 Payoffs:
– Player 1
•
•
•
•
If you choose hockey and the other player chooses hockey, you receive 3 pts
If you choose hockey and the other player chooses ballet, you receive 1 pt
If you choose ballet and the other player chooses ballet, you receive 3 pts
If you choose ballet and the other player chooses hockey, you receive 0 pts
– Player 2
•
•
•
•
If you choose hockey and the other player chooses hockey, you receive 3 pts
If you choose hockey and the other player chooses ballet, you receive 0 pts
If you choose ballet and the other player chooses ballet, you receive 3 pts
If you choose ballet and the other player chooses hockey, you receive 1 pt
Payoff Matrix
Player 2
Player 1
Hockey
Ballet
3;3
1;1
0;0
3;3
Hockey
Ballet
Any guesses on the
name of this game?
Battle of the Sexes
What was the point of this
experiment?
1. To see if people prefer hockey to ballet?
2. To see if people can coordinate?
3. To see who is more likely to coordinate?
4. Did people learn to coordinate?
5. To see if people behave the way John Nash
theorizes they should?
How do we answer these
questions?
 Need some basic statistical tools
 Need to understand the design of the
experiment
 In order to understand how an experiment is
designed, we first need to:
1. Define what an experiment is
2. List the ingredients to an experiment
What is an experiment?
An experiment is an effective procedure
for the discovery of, and selection
between, different possible explanations
that are of equivalent or greater or lesser
importance to us
What is the goal of experimental
economics?
The goal of experimental economics is an
increased understanding of real world
phenomena by designing effective
experiments to systematically break model
assertions
Why are experiments useful?
Why are experiments useful?
1.
2.
3.
4.
Refine theories
Construct new theories
Design/redesign/wreck institutions
Test predictions
Suggests/modifies
EMPIRICS
THEORY
Tests/modifies
Some Reasons Economists Run
Experiments
1. Test a theory or discriminate between theories
 Public goods and free-riding
 Social identity and favouritism
2. Explore the causes of a theory’s failure
 Learning
 often theories that initially perform poorly show
improvement if subjects get more experience
 Subject Motivation
 often theories show improvement when payoffs are
increased
Some Reasons Economists Run
Experiments
3. Compare institutions
 Dutch vs. English Auction
4. Evaluate policy proposals
 Corruption monitoring  top-down vs. bottom-up
5. The lab as a testing ground for institutional
design
 Smith and market efficiency
What are the ingredients to an
experiment?
1.
Subjects
•
•
Often undergrad students (e.g. CalTech)
People from developing countries
•
•
2.
Policy-based experiments
Cheaper, lower opportunity cost
Observed behaviour
of participants
constitute the
controlled variables
Environment
•
•
•
3.
Initial endowment
Preferences
Costs that motivate exchange
Institutions
•
Market communication
•
•
•
Controlled by
monetary rewards
e.g. bids, offers, acceptances
Rules that govern exchange of information
Rules under which messages become binding
Defined by
experimental
instructions
What were the ingredients to our
experiment?
1.
Subjects


2.
Environment


3.
20 students from ECON 282
10 male, 10 female
Player 1(2) weakly preferred hockey (ballet)
Did not give monetary incentive (Big Problem)
Institutions




Players were paired up and remained in these pairs for both
periods in the experiment
Players saw who their partner was
Players simultaneously chose either hockey or ballet
Players were not allowed to communicate between periods
How do these ingredients allow
us to answer our questions?
1. Which activity do people prefer?
This was not the goal of the experiment,
as subjects were to have had their
preferences induced by the associated
payoffs
Is there a problem with labeling the two
choices as hockey and ballet? YES!
1. Which activity do people prefer?
14
Frequency
12
10
8
6
4
2
0
Hockey
Ballet
Activity
2. Can people Coordinate?
For this game, coordinating is considered
when both players either choose hockey
or ballet
How should we define coordinate?
If one group coordinates at least once in
either round?
If there are more instances of groups
coordinating than not (in either round)
2. Can people Coordinate?
30
Frequency
25
20
15
10
5
0
(H,H) or (B,B)
(B,H) or (H,B)
Coordination
3. Were there groups that were
more or less likely to coordinate?
 Need to compare coordination across
treatments:
1. Female-male
2. Male-male
3. Female-female
3. Were there groups that were
more or less likely to coordinate?
Frequency of Coordination
8
7
6
5
4
3
2
1
0
Male-Male
Female-Female
Treatment Group
Female-Male
4. Did people learn to coordinate?
• Understanding learning involves
comparing behaviour over time
• In our experiment, this means comparing
coordination between the 1st round and the
2nd
4. Did people learn to coordinate?
Frequency of Coordination
12
10
8
6
Series1
4
2
0
Round 1
Round 2
Round
5. Was Nash correct?
 Nash’s theory says that players should either
both play hockey or both play ballet or play
some mixture of the two, with the preferred
activity played more often than the other
Previous experiments suggest that after many rounds
of play, subjects converge to a pattern of coordinating
on both hockey and ballet
 What do the results from our experiment
indicate?
Not enough observations to make a statistically
significant comment
What are some General things Economists
have Learned from Experiments?
1. Institutions matter
 Because information and incentives matter
2. “The Endowment Effect”
 People value a good more once their property right
to it has been established
 This is inconsistent with standard economic theory
that says a person’s willingness-to-pay for a good
should equal their willingness-to-accept
compensation to be deprived of the good
What are some General things Economists
have Learned from Experiments?
3. Common information is not sufficient to yield
common expectations or “knowledge”


There is no assurance that publicly announcing instructions
will yield common expectations among players since each
person may still be uncertain about how others will use the
information
As subjects gain experience, they tend to foster common
expectations
4. Information: less can be better

e.g. continuous double auction: private vs. complete and
common information


Private information treatments converge to the equilibrium outcome quicker and
more dependently
This is because when people have complete information they can identity more selfinterested outcomes than competitive equilibria and use punishing strategies in an
attempt to achieve them, which delays reaching equilibrium
What are some General things Economists
have Learned from Experiments?
5. Dominated strategies are for playing, not
eliminating

Prisoner’s dilemma: it is optimal for both to cooperate, but it is
dominant for both to defect
6. Fairness: taste or expectation


People think it is unfair for firms to increase price unless it is
because costs increase
But theory predicts price can increase due to shortages
(caused by an increase in demand)

e.g. price of shovels increase after a blizzard
What are some General things Economists
have Learned from Experiments?
7. Unconscious optimization in market interactions
 Economic agents can achieve efficient outcomes which are not
part of their intentions
 Cannot rule out the possibility the unconscious is a better
decision make than the conscious
Now it’s Time for our
Experiment!
nd
2
Experimental Instructions
Think long and hard at how far it is (in km)
from Vancouver to HCMC
Write your best guess down on a piece of
paper (and hand it in)
Now, take your next best guess, write it
down, and hand it in
ANSWER
Approximate distance from Vancouver
Canada to Ho Chi Minh City Vietnam is
11763 km
Results to be announced at the
beginning of next class….