ECON 282: Introduction to ECON 282: Introduction to Experimental EconomicsExperimental Economics

Professor Graeme Walker

office: WMC 2696office hours: 3:00-4:00 (Monday) or by appointmentemail: gmw1@sfu.ca

“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

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

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:

1. Markets and market design2. Game theory3. Econometrics4. Social economics (e.g. identity, learning, networks)5. Crime and Punishment6. Development Economics

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 webpageYou 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.

Grading1. Participation 10%

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

2. 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

3. Midterm 30% Tentatively set for June 27th

4. Final Exam 40% August 13th

Course ScheduleDate Lecture Tutorial

May 9 Introduction NO TUTORIALS

May 16 Experimental Design NO TUTORIALS

May 23 NO CLASSES Experiment #1: Markets

May 30 Data Analysis: Qualitative NO TUTORIALS

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 NO TUTORIALS

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 NO CLASSES NO TUTORIALS

August 8 Development NO TUTORIALS

Textbooks

Textbooks are recommended not requiredThere 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

Now it’s Time for our 1st Experiment!

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 hockey, you receive 3 pts• If you choose hockey and the other player chooses ballet, you receive 0 pts• 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 1 pt

Payoff Matrix

Player 2

Player 1 Hockey Ballet

Hockey3 ; 3 1 ; 1

Ballet0 ; 0 3 ; 3

Any guesses on the name of this game?

Battle of the Sexes

What was the point of this experiment?

1. To see if people prefer hockey to ballet?

2. To see if people can coordinate?

3. To see who is more likely to coordinate?

4. Did people learn to coordinate?

5. To see if people behave the way John Nash theorizes they should?

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:1. Define what an experiment is

2. List the ingredients to an experiment

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

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

Why are experiments useful?

Why are experiments useful?

1. Refine theories

2. Construct new theories

3. Design/redesign/wreck institutions

4. Test predictions

THEORYEMPIRICS

Suggests/modifies

Tests/modifies

Some Reasons Economists Run Experiments1. Test a theory or discriminate between theories

Public goods and free-riding Social identity and favouritism

2. 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

Some Reasons Economists Run Experiments3. 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

What are the ingredients to an experiment?1. Subjects

• Often undergrad students (e.g. CalTech)• People from developing countries

• Policy-based experiments• Cheaper, lower opportunity cost

2. Environment• Initial endowment• Preferences• Costs that motivate exchange

3. Institutions• Market communication

• e.g. bids, offers, acceptances• Rules that govern exchange of information• Rules under which messages become binding

Controlled by monetary rewards

Defined by experimental instructions

Observed behaviour of participants constitute the controlled variables

What were the ingredients to our experiment?1. Subjects

20 students from ECON 282 10 male, 10 female

2. Environment Player 1(2) weakly preferred hockey (ballet) Did not give monetary incentive (Big Problem)

3. 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

How do these ingredients allow us to answer our questions?

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!

1. Which activity do people prefer?

0

2

4

6

8

10

12

14

Hockey Ballet

Activity

Fre

qu

ency

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)

2. Can people Coordinate?

0

5

10

15

20

25

30

(H,H) or (B,B) (B,H) or (H,B)

Coordination

Fre

qu

ency

3. Were there groups that were more or less likely to coordinate? Need to compare coordination across

treatments:1. Female-male

2. Male-male

3. Female-female

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

0

1

2

3

4

5

6

7

8

Male-Male Female-Female Female-Male

Treatment Group

Fre

qu

ency

of

Co

ord

inat

ion

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

4. Did people learn to coordinate?

0

2

4

6

8

10

12

Round 1 Round 2

Round

Fre

qu

ency

of

Co

ord

inat

ion

Series1

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 ballet

What do the results from our experiment indicate?Not enough observations to make a statistically

significant comment

What are some General things Economists have Learned from Experiments?

1. Institutions matter Because information and incentives matter

2. “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

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

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

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

Now it’s Time for our 2nd Experiment!

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

ANSWER

Approximate distance from Vancouver Canada to Ho Chi Minh City Vietnam is 11763 km

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