Introduction to Experimental Economics
Why Do Economists Conduct Experiments?
Before we answer this question, it is necessary to define certain terms important to the study of experimental economics. Every experiment is defined by the environment, or the monetary rewards of the experiment. These are the things that motivate exchange. Another important term that experiments use is institutions which define language such as bids, offer, or acceptances as well as the rules about the exchange of information and contracts. Finally the last term is behavior which is how the participant reacts to the experiment.
Reasons Why
1. Test a theory, or discriminate between theories
In order to test a theory, the experimenter must compare what the theory is trying to prove to the observations that are conducted by and experiment. A good theory is when the predictions are more right than they are wrong. Theories are generally subjected to may different tests, and therefore are almost always in need of improvement.
2. Explore the causes of a theory’s failure
After the testing of the theory shows that there is something about it that needs improvement, the experimenter has to make sure that there is something wrong with the theory and not the design of the experiment. When it is confirmed that it is not in fact the design that is causing the incorrect data, the experimenter must find out what is wrong with the theory. This part is vital to anyone who needs to adjust a theory. General things that could improve a theory are if subjects are given more experience or the payoffs are increased, but it is not guaranteed that these will improve every theory.
3. Establish empirical regularities as a basis for new theory
Good theories come about by much observation and hard work. This inspires curiosity as to why there were such regularities. Because of increasing technology and the use of computers, it is just as easy to perform an experiment with complicated rules as to one that is simple. This allows experimenters to really look at the theory from every angle possible and see where the regularities lie. The double auction experiment, which is where buyers announce bid prices and sellers announce asking prices and a binding contract occurs when the buyer accepts a seller’s ask, is one of the theories where it was experimented for a long time in the laboratory before it was released for others to model it.
4. Compare environments
When the experimenter compares the environment of an experiment using the same rules, they find what makes the theory break down if anything. This is important because if one doesn’t do this, then they won’t find the nit picky things that are wrong with the theory until it is already released and being modeled and then someone else might find something wrong with it. The experimenter also finds out more about how people react in a certain environment.
5. Compare institutions
When the experimenter uses the same environments, but they change the rules of exchange is also another way to break down a theory to make it more useful. Some examples of this “include the comparison of the English, Dutch, first and second price sealed bid auctions, the comparison of uniform and discriminative price multiple unit auctions, and the comparison of posted pricing with double auction trading.” People learn more about which rules cause certain reactions.
6. Evaluate policy proposals
A theory can tell someone whether a policy proposal is good or not. For example, “Friedman’s original proposal the Treasury auction securities in one-price auctions led to their comparison with the discriminative rules.”
7. The laboratory as a testing ground for institutional design
The laboratory use for conducting experiments of theories is growing. If it wasn’t for experiments, we would not be able to understand many different games about economics.
