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Experimental economics

From Academic Kids

Experimental Economics is the use of experimental methods to evaluate theoretical predictions of economic behaviour. Historically most economics experiments were conducted in the laboratory, but recently interest in economics field experiments has grown.

Contents

Experimental Topics

Economics experiments can be loosely classified into the following topics: Market Games, Bargaining, Auctions, Social Preferences, Learning, Matching, and Field Experiments.

Market Games

Vernon Smith of the Interdisciplinary Center for Economic Science at George Mason University conducted pioneering economics experiments on the convergence of prices and quantities to their theoretical equilibrium values in experimental markets. Smith studied the behaviour of mock "buyers" and "sellers", who are told how much they "value" a fictitious commodity, and then asked to competitively "bid" or "ask" on these commodities following the rules of various real world market institutions such as the English auction and the Dutch auction (see Auctions). Smith found that the price and quantities traded in such markets quickly converge on the values that would be predicted by the economic theory of perfect competition, in spite of the fact that many of the assumptions of perfect competition (large numbers, perfect information) are not met.

Over the years, Smith pioneered -along with other collaborators- the use of controlled laboratory experiments in economics, and gave established it as a legitimate tool in economics and other related fields. In 2002, Smith was awarded (jointly with Daniel Kahneman) the Nobel Prize in Economics "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms".

Social Preferences

The term "social preferences" refers to the concern (or lack thereof) that people have for each other's well-being, and it encompasses altruism, spitefulness, tastes for equality, and tastes for reciprocity. Experiments on social preferences generally study economic games including the Dictator Game, the Ultimatum Game, the Trust game, the Public goods game, and modifications to these canonical settings. As one example of results, ultimatum game experiments have shown that people are generally willing to sacrifice monetary rewards when offered unequal allocations, thus behaving inconsistently with simple models of self-interest. Interestingly, the direction and size of the bias varies between cultures. (More market-orientated societies tend to have higher inequity aversion.)

Behavioural biases in auctions

Kahneman's experiments actually went further into the auction experiments with which Smith had begun the discipline. He showed that a naive crowd tends to pay more for any item when it sold via an (increasing price) English auction, rather than a (declining price) Dutch auction.

One explanation of this bias is that a declining price generates a sense of "suspense", whereas an increasing price tends to give the ultimate victor in a bidding war an extra sense of satisfication. Therefore, the social pressure not to lose may add an extra utility to winning beyond that of the item purchased. Another explanation is the idea in a common value auction that seeing other people bid for the same thing increases its probable value. (See: Classroom experiment example of Dutch auction under-valuation (http://home.cerge-ei.cz/ortmann/papers/04auctionsYK.pdf).)

Methodology

Guidelines

Experimental economists generally adhere to the following methodological guidelines:

  • Incentivize subjects with real monetary payoffs.
  • Publish full experimental instructions.
  • Do not use deception.
  • Avoid introducing specific, concrete context.

Critiques

The above guidelines have developed in large part to address two central critiques. Specifically, economics experiments are often challenged because of concerns about their "internal validity" and "external validity." (E.g. that they are not applicable models for many types of economic behaviour, so the experiments simply aren't good enough to produce useful answers.)

Some economic theorists, especially the Austrian school, reject the entire concept of economic empiricism, since they reach their conclusions strictly by deduction (from axioms arrived at introspectively).

Resources

See also

Links:

de:Experimentelle Íkonomie el:Πειραματικά οικονομικά fi:Kokeellinen taloustiede

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