What is Experimental Economics? - Economic Science - Economic Theories (2022)

Quite generally we can think of experimental outcomes (the observed replicable order in final allocations) as the consequence of individual choice behavior, driven by the economic environment and mediated by the language and rules governing interactions supplied by the institution. The economic environment consists of agent preferences, knowledge, skill endowments, and resource constraints. Abstractly, institutions define the mapping from agent choice of messages (e.g., bids, asks, acceptances, moves in a game tree, words, actions) into outcomes. Under the operation of these rules, or of norms, people choose messages given the economic environment. A well-established finding in experimental economics is that institutions matter because the rules matter, and the rules matter because incentives matter. But the incentives to which people respond are sometimes not those one would expect based on the canons of economic/game theory. It turns out that people are often better, and sometimes worse, at achieving gains for themselves and others than is predicted by standard forms of rational analysis. These contradictions provide important clues to the implicit rules that people may follow and can motivate new theoretical hypotheses for examination in the laboratory.

The design of experiments is motivated by two quite distinct concepts of a rational order. Rejecting or denying either of these concepts should not be construed as irrational. Thus, if people in certain contexts choose outcomes yielding the smaller of two rewards, we ask why, rather than conclude that this is irrational.

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The first concept of a rational order derives from today's standard social-economic science model (SSSM) going back to the seventeenth century. The SSSM is an example of what Hayek has called, constructivist rationalism, which, in its modern forms and power, stems from Descartes, who believed and argued that all worthwhile social institutions were and should be created by conscious deductive processes of human reason. Truth is derived and derivable from premises that are obvious and unassailable. Thus, in positive economics it has been argued influentially that you judge the validity of a model by its predictions, not by its assumptions--a methodology that provides limited guidance in experimental studies where one can control the economic environment and institutional rules. In economics the SSSM leads to rational predictive models of decision that motivate research hypotheses that experimentalists have been testing in the laboratory since mid twentieth century. The test results are decidedly mixed, and this has motivated constructivist extensions of game theory, most notably based on other-regarding, in addition to own-regarding, preferences, and on 'learning'--the idea that the predictions of the SSSM might be approached over time by trial-and-error adaptation processes.

For tractability, Cartesian rationalism provisionally requires agents to possess complete information - far more than could ever be given to one mind. In economics the resulting analytical exercises, while yielding insightful theorems, are designed to aid and sharpen thinking - if-then parable. Yet, these exercises may not approximate the level of ignorance that has conditioned institutions, as abstract rules independent of particular parameterizations that have survived as part of the world of experience. The temptation, of course, is to ignore this reality, because it is poorly understood, and to proceed in the implicit belief that our parables capture what is most essential in understanding what we observe.

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Our theories and thought processes about social systems involve the conscious and deliberate use of reason. Therefore, it is necessary to constantly remind ourselves that human activity is diffused and dominated by unconscious, autonomic, neuropsychological systems that enable people to function effectively without always calling upon the brain's scarcest resource: attentional circuitry. This is an important economizing property of how the brain works. If it were otherwise, no one could get through the day under the burden of self-conscious monitoring and planning every trivial action in detail. Also, no one can express in thoughts, let alone words, all that he or she knows, and does not know, but might need to know for some purposive action. For example, imagine the drain on the brain's resources if at the supermarket a shopper were required to explicitly evaluate the utility from every combination of the tens of thousands of grocery items that are feasible for a given budget. Such mental processes are costly and implicitly we must avoid costs that are not worth the benefit. The challenge of any action or problem triggers first a search by the brain to bring to the conscious mind what one knows that is related to the decision context. Context triggers autobiographical experiential memory, which explains why context surfaces as a nontrivial treatment in small group experiments.

We do not recall learning most of our operating knowledge - natural language is the most prominent example, but, of particular relevance for experimental economics, also virtually everything that constitutes our developmental socialization. We learn the rules of a language and of social intercourse without explicit instruction simply by exposure to family and extended family social networks.

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These considerations lead to the second concept of a rational order, an undesigned ecological system that emerges out of cultural and biological evolutionary processes: home grown principles of action, norms, traditions, and morality. Thus, "the rules of morality…are not the conclusions of our reason." According to Hume, who was concerned with the limits of reason and the boundedness of human understanding, rationality was a phenomena that reason discovers in emergent institutions. Adam Smith expressed the idea of emergent order in both

The Wealth of Nations

and

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The Theory of Moral Sentiments

. According to this concept of rationality, truth is discovered in the form of the intelligence embodied in rules and traditions that have formed, inscrutably, out of the ancient history of human social interactions. This is the antithesis of the Cartesian and contemporary belief that if an observed social mechanism is functional, somebody in the unrecorded past must have used reason consciously to create it to serve its currently perceived intended purposes. In experimental economics this tradition is represented by the discovery of emergent order in numerous studies of existing market institutions such as the double auction. To paraphrase Adam Smith, people in these experiments are led to promote welfare enhancing social ends that are not part of their conscious intention. This principle is supported by hundreds of experiments whose environments and institutions exceed the capacity of formal game theoretic analysis. But they do not exceed the functional capacity of collectives of incompletely informed human decision makers whose mental algorithms coordinate behavior through the rules of the institution--social algorithms--to generate high levels of measured performance. Acknowledging and recognizing the workings of unseen processes are essential to the growth of our understanding of social phenomena, and we must strive not to exclude them from our inquiry, if we have any hope of understanding data inside or outside of the laboratory. In this way we at least can attempt to escape the very significant disadvantage of being a human in studying human behavior. Even those who study primates must deal with natural tendencies to anthropomorphize what they observe; so strongly do we identify with our genetic cousins.

Ironically, the greatest success for non-cooperative equilibrium theory, that has emerged from experimental studies beginning over forty years ago, is its power to predict outcomes when people have incomplete (private) information on individual payoffs. This "success" has passed with little fanfare because of the standard assumption that decision-makers, like the theorist/experimentalist, must have complete information in order to construct the equilibrium.

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How are the two concepts of a rational order related?

Constructivism takes as given the social structures generated by emergent institutions that we observe in the world, and proceeds to model it formally. An example would be the Dutch auction or a sealed bid auction. Constructivists do not ask why or how that institution arose or what were the ecological conditions that created it; or why there are so many distinct auction institutions. In some cases it is the other way around. Thus, revenue equivalence theorems show that the standard auctions generate identical expected outcomes leaving no apparent economic reason for choosing between them. Using game theory to implement constructivist rationality, one represents a socioeconomic situation with an interactive game tree. The ecological concept of rationality asks from whence came the structure captured by the tree? Why this social practice, or game, and not another? Were there others that lacked survival properties and were successfully invaded by what we observe?

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The two types of rational order are both expressed in the experimental methodology developed for economic systems design. This branch of experimental economics uses the lab as a test-bed to examine the performance of proposed new institutions, and modifies their rules and implementation features in the light of the test results. The proposed designs are constructivist, although most applications, such as the design of electricity markets or auctions for spectrum licenses, are far too complicated for a complete formal analysis. But when a design is modified in the light of test results, the modifications tested, modified again, retested, and so on, one is using the laboratory to effect an evolutionary adaptation as in the second concept of a rational order. If the final result is implemented in the field, it certainly undergoes further evolutionary change in the light of practice, and of operational forces not tested in the experiments because they are unknown or beyond current laboratory capability.
Finally, understanding decision requires knowledge beyond the traditional bounds of economics, a challenge to which Hume and Smith were not strangers. This is manifest in recent studies of the neural correlates of strategic interaction using fMRI and other brain imaging technologies. This research explores intentions or "mind reading," and other hypotheses about information, choice, and own versus other payoffs in determining behavior.

FAQs

Is economics an experimental science? ›

Economics is an experimental science, as well as a theoretical and observational one. In this essay we discuss our views on what experiments can contribute to economics. Our focus is mainly on the relationship between theory and experiments.

Why is experimental economics important? ›

Experimental economics not only has allowed us to see how command and control regulations in the market affect behavior and produce unintended consequences, but also has helped address how public goods might be provided using market principles.

What are the 4 economic theories? ›

The 4 economic theories are supply side economics, new classical economics, monetarism and Keynesian economics.

What is economic experimentation? ›

Experimental economics uses controlled, scientific experiments to test what choices people actually make in specific circumstances. In 2002, Vernon Smith won the Nobel Prize in Economics for developing a methodology that allows researchers to test proposed new policies before they are implemented.

When did experimental economics start? ›

It is generally agreed now that the birth of experimental economics owes a lot to the publication of von Neumann and Morgenstern's Theory of Games and Economic Behavior (1944) and to the subsequent developments of game and decision theory.

What is a natural experiment in economics? ›

Natural experiments are real-life situations that economists study and analyse to determine cause-and-effect relationships. In some ways they are similar to clinical trials, in which researchers evaluate the effectiveness of new drugs by separating test and control groups at random.

What is meant by experimental method? ›

The experimental method involves manipulating one variable to determine if this causes changes in another variable. This method relies on controlled research methods and random assignment of study subjects to test a hypothesis.

What is the difference between Behavioural and experimental economics? ›

To make the distinction as brief as possible, Experimental Economics is best viewed as a methodological approach, a “tool-kit” if you will, to doing economics, while Behavioral Economics is more appropriately considered a research program defined by a particular set of assumptions about human economic behavior ( ...

Why can't economists make scientific experiments? ›

C) The inability in economics to make scientific experiments: Rather than proving the relationship between two variables through experiments, economists do this through the use of simplified models. For example, the Phillips curve helps to explain the relationship between employment and inflation.

What are the 3 types of economic theories? ›

The 3 major theories of economics are Keynesian economics, Neoclassical economics, and Marxian economics.

What are the 3 types of economic systems? ›

There are three main types of economic systems: command, market, and mixed. We will briefly describe each of these three types.

What are the 3 economic models? ›

It examines three models, including the multiplier-accelerator model, two-sector model for investment planning, and an optimizing allocation mode. All three models are set out in a very simple form.

What is an example of natural experiment? ›

In another example, a well-known natural experiment in Helena, Montana, smoking was banned from all public places for a six-month period. Investigators later reported a 60-percent drop in heart attacks for the study area during the time the ban was in effect.

What is the use of econometrics? ›

Econometrics uses economic theory, mathematics, and statistical inference to quantify economic phenomena. In other words, it turns theoretical economic models into useful tools for economic policymaking.

What is the meaning of public economics? ›

Public economics is the study of government policy through the lens of economic efficiency and equity. At its most basic level, public economics provides a framework for thinking about whether or not the government should participate in economics markets and to what extent its role should be.

Who is considered as the father of economics? ›

Adam Smith was an 18th-century Scottish philosopher. He is considered the father of modern economics. Smith is most famous for his 1776 book, "The Wealth of Nations."

Which system of economics is general equilibrium analysis? ›

General equilibrium analysis is the branch of economics concerned with the simultaneous determination of prices and quantities in multiple inter-connected markets. It contrasts with partial equilibrium analysis – models that consider only a single sector.

What does positive statement mean in economics? ›

A positive statement is one that can establish hypotheses that can be empirically tested. In contrast, a normative statement is instead based on opinion or subjective values.

What is a true experiment? ›

The term true experiment is sometimes used to refer to any randomized experiment. In other instances, the term true experiment is used to describe all studies with at least one independent variable that is experimentally manipulated and with at least one dependent or outcome variable.

What is the basic nature of experimentation? ›

In an experiment, an independent variable (the cause) is manipulated and the dependent variable (the effect) is measured; any extraneous variables are controlled. An advantage is that experiments should be objective.

Why are natural experiments important? ›

Natural experiments offer opportunistic evidence where a researcher-driven study may be impossible for reasons of intervention timing or exposure. Nevertheless, the ability to make causal inferences from natural experiments depends on optimising the research study design [74].

Who discovered experimental method? ›

From the above information, we can say that the Experimental method was first of all introduced by Wilhelm Wundt. UTET 2022 Admit Card released on 15th September 2022.

How many experimental methods are there? ›

The types of experimental research design are determined by the way the researcher assigns subjects to different conditions and groups. They are of 3 types, namely; pre-experimental, quasi-experimental, and true experimental research.

Why is experiment called the scientific method? ›

Experimental research is a scientific approach to research, where one or more independent variables are manipulated and applied to one or more dependent variables to measure their effect on the latter. ... Therefore, making it an example of quantitative research method.

Which is studied under experimental economics? ›

Experimental economics is a branch of economics that studies human behavior in a controlled laboratory setting or out in the field, rather than just as mathematical models.

What is laboratory economics method? ›

Economic laboratory can be used to study the strategic economic decision making through developing a combination of economic theory, game theory, behavioral economics, laboratory experiments, and research surveys.

Can economists conduct experiments? ›

An identical message was expressed after William Nordhaus joined him as a co-author: “economists cannot perform controlled experiments like chemists or biologists because they can't easily control other important factors.

Why is economic is a science? ›

Economics is a science because it studies the flow of information in a society. There is no larger a scientific concept than information. To study information is science, and there is no greater reason to claim to be a science than to study the flow of information in a society.

Is economics is a science or an art? ›

Economics is not a science, it's an art. It is often very complex and difficult. You often get many different answers about how the economy behaves.

What are the 2 economic theories? ›

There are two major schools of economic thought: Keynesian economics and free-market, or laissez-faire, economics.

What are the two types of economic theories? ›

Economic theories broadly fall under two categories: microeconomics and macroeconomics.

What is types of economy? ›

Economic systems can be categorized into four main types: traditional economies, command economies, mixed economies, and market economies.

What are the 7 types of economic system? ›

The different kinds of economic systems are Market Economy, Planned Economy, Centrally Planned Economy, Socialist, and Communist Economies. All these are characterized by the ownership of the economics resources and the allocation of the same.

What are the 5 characteristics of economic system? ›

Quite simply, there are more opportunities for more people. Based on a broad range of input from experts, academics, peers, and public opinion, the Foundation defines inclusive economies by five inter-related characteristics: participation, equity, growth, sustainability, and stability.

What are the 3 economic questions? ›

An economic system is any system of allocating scarce resources. Economic systems answer three basic questions: what will be produced, how will it be produced, and how will the output society produces be distributed? There are two extremes of how these questions get answered.

What are the 4 types of models? ›

Let us look at the different types of Models in the Fashion World:
  • Fashion (Editorial) Model.
  • Fashion (Catalog) Model.
  • Commercial Model.
  • Mature Model.
  • Promotional Model.
  • Parts Model.
  • Fit Model.
  • Fitness Model.
24 Jul 2019

What are the major theories of economic development? ›

Four common theories of development economics include mercantilism, nationalism, the linear stages of growth model, and structural-change theory.

What are the main characteristics of economic models? ›

This essay describes the seven key properties of useful economic models: parsimony, tractability, conceptual insightfulness, generalizability, falsifiability, empirical consistency, and predictive precision. of these properties, although almost no economic models have them all.

What are the three types of experiments? ›

3 Main Types of Scientific Experiments
  • Experimental, or randomized control, is the highest level of scientific experimentation. ...
  • Quasi-experimental is the second type of scientific experiment. ...
  • Non-experimental research is study in which no independent variable is manipulated. ...
  • References.

What are the advantages of experiments? ›

What Are the Advantages of Experimental Research?
  • It provides researchers with a high level of control. ...
  • There is no limit to the subject matter or industry involved. ...
  • Experimental research provides conclusions that are specific. ...
  • The results of experimental research can be duplicated.
13 Apr 2017

What are the 4 types of experimental research? ›

While this type of research falls under the broad umbrella of experimentation, there are some nuances in different research design. Four major design types with relevance to user research are experimental, quasi-experimental, correlational and single subject.

What are the types of econometrics? ›

There are two branches of econometrics: theoretical econometrics and applied econometrics. The former is concerned with methods, both their properties and developing new ones.

What are the types of data in econometrics? ›

There are three types of data: time series, cross-section, and a combination of them is called pooled data.

What are the characteristics of econometrics? ›

The three main aims econometrics are as follows:
  • Formulation and specification of econometric models: The economic models are formulated in an empirically testable form. ...
  • Estimation and testing of models: ...
  • Use of models: ...
  • Time series data. ...
  • Cross-section data. ...
  • Panel data: ...
  • Dummy variable data. ...
  • Aggregation over commodities:

What is a private sector in economics? ›

What is the Private Sector? The private sector is the part of the economy that is run by individuals and companies for profit and is not state controlled. Therefore, it encompasses all for-profit businesses that are not owned or operated by the government.

How debtors are affected during inflation? ›

During periods of rising prices, debtors gain and creditors lose. When prices rise, the value of money falls. Though debtors return the same amount of money, but they pay less in terms of goods and services. This is because the value of money is less than when they borrowed the money.

Which of the following is a characteristic of good tax system? ›

A good tax system should meet five basic conditions: fairness, adequacy, simplicity, transparency, and administrative ease. Although opinions about what makes a good tax system will vary, there is general consensus that these five basic conditions should be maximized to the greatest extent possible.

What is the difference between Behavioural and experimental economics? ›

To make the distinction as brief as possible, Experimental Economics is best viewed as a methodological approach, a “tool-kit” if you will, to doing economics, while Behavioral Economics is more appropriately considered a research program defined by a particular set of assumptions about human economic behavior ( ...

Can economists conduct experiments? ›

An identical message was expressed after William Nordhaus joined him as a co-author: “economists cannot perform controlled experiments like chemists or biologists because they can't easily control other important factors.

What is meant by experimental method? ›

The experimental method involves manipulating one variable to determine if this causes changes in another variable. This method relies on controlled research methods and random assignment of study subjects to test a hypothesis.

What is Praxeology in economics? ›

In short, praxeological economics is the structure of logical implications of the fact that individuals act. This structure is built on the fundamental axiom of action, and has a few subsidiary axioms, such as that individuals vary and that human beings regard leisure as a valuable good.

Which is studied under experimental economics? ›

Experimental economics is a branch of economics that studies human behavior in a controlled laboratory setting or out in the field, rather than just as mathematical models.

Why is it difficult for economists to conduct scientific experiments? ›

This is because factors are constantly changing. Therefore this makes scientific experiments difficult as we do not know the true strength of link between two variables as there may be other factors influencing the outcome.

How can we make economics interesting? ›

Interaction. Interacting with other students through games, discussions, and experiments are all seen as ways as making difficult economics easier to learn. “Discussion is a kind of active analyzing, which can make people excited and effectively inspire their initiative spirit.

What is the use of econometrics? ›

Econometrics uses economic theory, mathematics, and statistical inference to quantify economic phenomena. In other words, it turns theoretical economic models into useful tools for economic policymaking.

Who discovered experimental method? ›

From the above information, we can say that the Experimental method was first of all introduced by Wilhelm Wundt. UTET 2022 Admit Card released on 15th September 2022.

How many experimental methods are there? ›

The types of experimental research design are determined by the way the researcher assigns subjects to different conditions and groups. They are of 3 types, namely; pre-experimental, quasi-experimental, and true experimental research.

Why is experiment called the scientific method? ›

Experimental research is a scientific approach to research, where one or more independent variables are manipulated and applied to one or more dependent variables to measure their effect on the latter. ... Therefore, making it an example of quantitative research method.

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