Introduction to Experimental Economics

1
Introduction to Experimental Economics

• Lecture 1
• John Hey

2
Lecture 1

• Introduction, Overview and Experimental
  Methodology
• Practicalities.
• What is experimental economics?
• An example a simple experiment.
• Experimental practicalities.
• Applications and Generalisations.
• Some organisational details.

3
Practicalities

• Website http//www.york.ac.uk/depts/econ/coursewa
  re/ugm/exu.html
• Plan of module
• Lectures
• Seminars
• Reading
• Assessment

4
Lectures

• An introduction to and an overview of
  Experimental Economics, with a simple example.
• Testing the basic theory of decision making under
  risk used in economics (Expected Utility theory)
• Investigating simple dynamic decision problems
• Perceptions of gains to work a pilot experiment
  carried out for the Department for Work and
  Pensions of the UK government
• The provision of Public Goods
• Auctions
• Markets in the laboratory - the Double Auction
  mechanism
• Other market institutions and their relative
  properties
• Summary and overview and a glimpse of the future

5
What is Experimental Economics?

• Experimental economics is the use of experimental
  methods to evaluate theoretical predictions of
  economic behaviour.
• It uses controlled, scientifically designed
  experiments to test economic theories under
  laboratory conditions.
• Typical empirical research is limited by the fact
  that only a subset of the set of all possible
  influences affect (or can be observed to be
  affecting) economic decision making. This
  inhibits or severely limits the ability to
  control for certain influences.
• With experiments, economists can fix some inputs
  and measure the effects of other inputs in a way
  that allows ceteris paribus comparisons.
• (Wikipedia definition)

6
What is Experimental Economics?

• Roth A E (ed), Laboratory Experimentation in
  Economics Six Points of View, Cambridge
  University Press, 2005
• Speaking to Theorists
• Searching for Facts
• Whispering in the Ears of Princes

7
Practical Details

• Pose the subjects a well-defined problem to
  solve.
• Set the problem up in such a way that the
  decisions tell us something about
  theory/behaviour.
• Control things so that other things do not enter
  into the decision problem.
• Give them an appropriate incentive (usually
  money).

8
A Simple Experiment

• Foundational.
• Game theory...
• ....foundations of interactive decision-making.
• The concept of a Nash Equilibrium...
• ...everyone doing what is best for them given
  what everyone else is doing.
• Actually this is a bit stronger.

9
First simple game
10
Second simple game
11
Third simple game
12
Fourth simple game
13
Another game variant 1
14
Another game variant 2
15
Another game variant 3
16
Another game variant 4
17
Predictions?

• Nash Equilibrium (A,A)
• Driven by Dominance..

18
Experiment

• Two players who cannot communicate.
• Take decisions simultaneously and independently.
• Pay them. End of experiment.
• Problems?
• Expensive.
• Repeat with same partner? Finite/infinite.
• Repeat with new partners.

19
Practical Details

• Paper and pencil or computer?
• Recruitment of subjects?
• Magnitude of payments?
• Do we collect other information?
• How do we analyse the data?
• What is the source of any noise?

20
Applications and Generalisations

• Theory Testing in any context?
• Macro, International trade, Money...
• Generating new theories?
• Testing policy proposals?
• We shall see...!!

21
Some organisational details

• Seminars?
• Preparation for the seminars.
• See you next Monday!