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ECON 282: Introduction to Experimental Economics

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1 ECON 282: Introduction to Experimental Economics
Professor Graeme Walker office: WMC 2696 office hours: 3:00-4:00 (Monday) or by appointment

2 “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

3 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

4 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: Markets and market design Game theory Econometrics Social economics (e.g. identity, learning, networks) Crime and Punishment Development Economics

5 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.

6 Grading Participation 10% Assignments 20% Midterm 30% Final Exam 40%
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 This forces you to come to all experimental sessions If you know you cannot make it to one of the tutorials, come see me during my office hours Assignments 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 30% Tentatively set for June 27th Final Exam 40% August 13th

7 Course Schedule Date Lecture Tutorial May 9 Introduction NO TUTORIALS
Experimental Design May 23 NO CLASSES Experiment #1: Markets May 30 Data Analysis: Qualitative 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 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 August 8 Development

8 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

9 Now it’s Time for our 1st Experiment!

10 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 ballet, you receive 0 pts If you choose ballet and the other player chooses hockey, you receive 1 pt

11 Payoff Matrix Player 2 Player 1 Hockey Ballet 3 ; 3 1 ; 1 0 ; 0

12 Any guesses on the name of this game?

13 Battle of the Sexes

14 What was the point of this experiment?
To see if people prefer hockey to ballet? To see if people can coordinate? To see who is more likely to coordinate? Did people learn to coordinate? To see if people behave the way John Nash theorizes they should?

15 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: Define what an experiment is List the ingredients to an experiment

16 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

17 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

18 Why are experiments useful?

19 Why are experiments useful?
Refine theories Construct new theories Design/redesign/wreck institutions Test predictions Suggests/modifies EMPIRICS THEORY Tests/modifies

20 Some Reasons Economists Run Experiments
Test a theory or discriminate between theories Public goods and free-riding Social identity and favouritism 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

21 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

22 What are the ingredients to an experiment?
Subjects Often undergrad students (e.g. CalTech) People from developing countries Policy-based experiments Cheaper, lower opportunity cost Environment Initial endowment Preferences Costs that motivate exchange Institutions Market communication e.g. bids, offers, acceptances Rules that govern exchange of information Rules under which messages become binding Observed behaviour of participants constitute the controlled variables Controlled by monetary rewards Defined by experimental instructions

23 What were the ingredients to our experiment?
Subjects 20 students from ECON 282 10 male, 10 female Environment 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

24 How do these ingredients allow us to answer our questions?

25 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!

26 1. Which activity do people prefer?

27 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)

28 2. Can people Coordinate?

29 3. Were there groups that were more or less likely to coordinate?
Need to compare coordination across treatments: Female-male Male-male Female-female

30 3. Were there groups that were more or less likely to coordinate?

31 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

32 4. Did people learn to coordinate?

33 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

34 What are some General things Economists have Learned from Experiments?
Institutions matter Because information and incentives matter “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

35 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 self-interested outcomes than competitive equilibria and use punishing strategies in an attempt to achieve them, which delays reaching equilibrium

36 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

37 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

38 Now it’s Time for our 2nd Experiment!

39 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

40 ANSWER Approximate distance from Vancouver Canada to Ho Chi Minh City Vietnam is km

41 Results to be announced at the beginning of next class….

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