Presentation on theme: "ECON 282: Introduction to Experimental Economics"— Presentation transcript:
1 ECON 282: Introduction to Experimental Economics Professor Graeme Walkeroffice: WMC 2696office 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 IntroductionIf 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 OutlineThe 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 experimentsIn doing this, you will be exposed to a wide range of topics in economics including:Markets and market designGame theoryEconometricsSocial economics (e.g. identity, learning, networks)Crime and PunishmentDevelopment Economics
5 Course OutlineThis 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 webpageYou should print these out before coming to the lecture (try printing 4 slides to a pagePre-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 tutorialsAttendance will be takenThe full participation grade will be given randomly for one of the experimental sessionsThis forces you to come to all experimental sessionsIf you know you cannot make it to one of the tutorials, come see me during my office hoursAssignments 20%There will be 2 assignments of equal weightAssignments will involve data analysisYou can work in groups of up to 3 membersMidterm 30%Tentatively set for June 27thFinal Exam 40%August 13th
7 Course Schedule Date Lecture Tutorial May 9 Introduction NO TUTORIALS Experimental DesignMay 23NO CLASSESExperiment #1: MarketsMay 30Data Analysis: QualitativeJune 6Data Analysis: QuantitativeExperiment #2: Public GoodJune 13MarketsHow to use excel, Sample questionsJune 20Public GoodsASS#1 dueJune 27MIDTERMJuly 4Game TheoryExperiment #3: UltimatumJuly 11Social PreferencesExperiment #4: CrimeJuly 18Social IDSample questionsJuly 25CrimeASS #2 dueAugust 1August 8Development
8 Textbooks Textbooks are recommended not required There will be a number of papers covered in lectures…the relevant parts should be readI will post what is relevant and from which article
10 Experimental Instructions Players:1 and 2Actions:each player chooses whether to attend a hockey game or the balletPayoffs:Player 1If you choose hockey and the other player chooses hockey, you receive 3 ptsIf you choose hockey and the other player chooses ballet, you receive 1 ptIf you choose ballet and the other player chooses ballet, you receive 3 ptsIf you choose ballet and the other player chooses hockey, you receive 0 ptsPlayer 2If you choose hockey and the other player chooses ballet, you receive 0 ptsIf you choose ballet and the other player chooses hockey, you receive 1 pt
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 toolsNeed to understand the design of the experimentIn order to understand how an experiment is designed, we first need to:Define what an experiment isList 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
19 Why are experiments useful? Refine theoriesConstruct new theoriesDesign/redesign/wreck institutionsTest predictionsSuggests/modifiesEMPIRICSTHEORYTests/modifies
20 Some Reasons Economists Run Experiments Test a theory or discriminate between theoriesPublic goods and free-ridingSocial identity and favouritismExplore the causes of a theory’s failureLearningoften theories that initially perform poorly show improvement if subjects get more experienceSubject Motivationoften theories show improvement when payoffs are increased
21 Some Reasons Economists Run Experiments 3. Compare institutionsDutch vs. English Auction4. Evaluate policy proposalsCorruption monitoring top-down vs. bottom-up5. The lab as a testing ground for institutional designSmith and market efficiency
22 What are the ingredients to an experiment? SubjectsOften undergrad students (e.g. CalTech)People from developing countriesPolicy-based experimentsCheaper, lower opportunity costEnvironmentInitial endowmentPreferencesCosts that motivate exchangeInstitutionsMarket communicatione.g. bids, offers, acceptancesRules that govern exchange of informationRules under which messages become bindingObserved behaviour of participants constitute the controlled variablesControlled by monetary rewardsDefined by experimental instructions
23 What were the ingredients to our experiment? Subjects20 students from ECON 28210 male, 10 femaleEnvironmentPlayer 1(2) weakly preferred hockey (ballet)Did not give monetary incentive (Big Problem)InstitutionsPlayers were paired up and remained in these pairs for both periods in the experimentPlayers saw who their partner wasPlayers simultaneously chose either hockey or balletPlayers 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 payoffsIs there a problem with labeling the two choices as hockey and ballet? YES!
27 2. Can people Coordinate?For this game, coordinating is considered when both players either choose hockey or balletHow 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)
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 otherPrevious experiments suggest that after many rounds of play, subjects converge to a pattern of coordinating on both hockey and balletWhat 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 matterBecause information and incentives matter“The Endowment Effect”People value a good more once their property right to it has been establishedThis 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 informationAs subjects gain experience, they tend to foster common expectations4. Information: less can be bettere.g. continuous double auction: private vs. complete and common informationPrivate information treatments converge to the equilibrium outcome quicker and more dependentlyThis 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 eliminatingPrisoner’s dilemma: it is optimal for both to cooperate, but it is dominant for both to defect6. Fairness: taste or expectationPeople think it is unfair for firms to increase price unless it is because costs increaseBut 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 interactionsEconomic agents can achieve efficient outcomes which are not part of their intentionsCannot rule out the possibility the unconscious is a better decision make than the conscious
39 Experimental Instructions Think long and hard at how far it is (in km) from Vancouver to HCMCWrite 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 ANSWERApproximate distance from Vancouver Canada to Ho Chi Minh City Vietnam is km
41 Results to be announced at the beginning of next class….