Transcript An Introduction to Experimental Economics: How to gain an

An Introduction to Experimental
Economics:
How to gain an insight into human's behaviour and
decisions
Donhatai Harris
[email protected]
Cambridge Experimental &Behavioural Research Group
(CEBEG)
Faculty of Economics
University of Cambridge, UK
Outline of Today’s Lecture
I. Why Experiment?
II. What is experimental economics?
III. How to conduct an experiment: Key Principles of
experimental economics
IV. Previous experiment work in Thailand (Harris et al.,
2008)
V. Key contributions of Experimental Economics to
Economics Discipline and Future Challenges.
Donhatai Harris
I. Why experiment?
Donhatai Harris
I. Why experiment?
 Economics has been regarded as a non-experimental
science, where researchers – as in astronomy or
meteorology – have had to rely exclusively on field data,
that is, direct observations of the real world.
 The lack of experimental data meant that when an
economic proposition appeared not to be captured by the
data or the outcome was not as predicted by the theory,
the quality of the data was more likely to be questioned
than the relevance or quality of the theory
But the theory may not always be correct,
particularly in predicting human
behaviour!
Donhatai Harris
II. What is Experimental Economics?
Objectives of Economic Experiments
 Testing theories
 Establish empirical regularities as a basis for new
theories
 Testing institutions
 Studying preferences and decision-making
 Goods (public goods), risk, fairness, time preference
 Replication of previous work
 Teaching economics
Donhatai Harris
II. What is experimental economics?
Donhatai Harris
II. What is Experimental Economics?
Experimental economics is an empirical tool that
enables economists to understand the extent to
which an individual’s decision and behaviour are
affected by various (testable) factors in a controlled
environment.
Donhatai Harris
II. What is Experimental Economics?
 To establish whether an independent variable influences
the dependent variable (outcome) “treatment
effect”  need to establish counter-factual.
 Controlled experiments represent the most convincing
method of creating the counterfactual, since they directly
construct a control group via randomization.
Donhatai Harris
I. Why experiment?
An example:
Theory: Sub-game perfect equilibrium (Selten, 1965)
Experiment: A simple bargaining game with 2 players
(Guth, Schmittberger and Schwarze, 1982):
 Player 1 makes a proposal for how a sum of money is to
be split between players 1 and 2.
 Player 2 then either accepts, implementing the proposal,
or rejects, in which case the interaction ends with zero
payoffs for each.
What is SPE? & What do you think happens in
the experiment?
Donhatai Harris
II. What is Experimental Economics?
The result show…
 A marked contrast between theory and experiment
 But why should we be interested in this result?
 Is the experimental environment sufficiently close to the
situation of interest to be informative?
Rather..we should ask
 How special is the laboratory environment generating
the experimental results?
 Is it just one result? Can it be replicated? Is it robust?
Donhatai Harris
II. What is Experimental Economics?
 The body of experimental evidence suggests that our
simplest theories of bargaining leave some aspects of
behaviour unexplained.
 The importance of reciprocity and fairness concerns 
Theory of Inequity Aversion Preference (Fehr and
Schmidt, “A Theory of Fairness, Competition, and
Cooperation”, Quarterly Journal of Economic, 1999)
“In addition to selfish individuals, there are people who
dislike outcomes that are perceived as inequitable.”
Donhatai Harris
II. What is Experimental Economics?
The model is centred around a utility function that involves one's
own payoff and the payoff of one's opponent, and that exhibits some
aversion to payoff inequality.
The second term in (1)or (2) measures the utility loss from
disadvantageous inequality, while the third term measures the
loss from advantageous inequality.
Donhatai Harris
II. What is Experimental Economics?
Typology of economic experiments
(Harrison & List, Journal of Economic Literature 2004)
 Conventional lab experiment
▫ Standard subject pool of students
▫ Abstract framing
▫ Imposed set of rules
 Artefactual field experiment
▫ Like a conventional lab experiment but with a non-standard (i.e.,
non-student) subject pool
 Framed field experiment
▫ same as an artefactual field experiment, but with field context in
either the commodity, task, or information set that the subjects
can use
 Natural Field Experiment
▫ same as a framed field experiment but where the environment is
one where the subjects naturally undertake these tasks and where
the subjects do not know that they are in an experiment.
Donhatai Harris
II. What is Experimental Economics?
Sources of empirical data
Happenstance
Field
•GDP
•Inflation
•Unemployment rate
Experimental
•
•
•
(field data from
economic outcomes)
Lab
Discovery of Penicillin
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Policy experiments
Experiments as part of
representative surveys
Experiments conducted outside
the lab
Laboratory experiment
In a controlled environment
III. How to conduct a laboratory
experiment
Donhatai Harris
III. How to conduct an experiment?
Key principles (Smith, 1982; 1994)
 In laboratory experiment, a microeconomic system is created
which reflects a complete and self-contained economy.
 Two important components:
(i) Environment:
▫ Economic agents with Preferences, technology, and initial
endowments
▫ Controlled by using monetary rewards
(ii) Institution (rules of the game):
▫
▫
▫
▫
Possible actions
Sequence of actions
Information conditions
Framing (language, story)
Donhatai Harris
III. How to conduct an experiment?
The Essence of Economic Experiments
 Experimenter knows what is exogenous and
endogenous.
 Experimenter controls information conditions.
 Experimenter knows the theoretical equilibrium
and adjustment can be studied.
 Evidence is replicable.
Donhatai Harris
III. How to conduct an experiment?
Control
 To control a variable means fixing and maintaining it at
some constant level, or alternatively, set it at different
levels across different experiments or at different points
of time in the same experiments.
 The subjects are likely to have prior characteristics and
preferences which are difficult to observe. Therefore,
control over preferences is the most significant element
of laboratory experiments.
 In many experiments the experimenter wants to
control subjects’ preferences. How can this be
achieved?
Donhatai Harris
III. How to conduct an experiment?
Theory of Induced Valuation
 Subjects’ “homegrown” preferences must be
“neutralized” and the experimenter “induces” new
preferences. Subjects’ actions should be driven by the
induced preferences.
 This is done by inducing or controlling valuations by
making the objects of trade = valueless tokens, which
can be exchanged into real money at the end of the
experiment.
Donhatai Harris
III. How to conduct an experiment?
 Reward Medium: Money m = (m0 + m) where m0
represents a subject’s “outside” money, m denotes
money earnings in the experiment.
 Subject’s unobservable preference: V(m0 + m, z) where
z represents all other motives e.g. boredom
 In order to minimise the effects of m0 and z, whilst
maximise the effect of m, laboratory experiments are
required to satisfy 5 important conditions which are
known as “precepts”
Donhatai Harris
III. How to conduct an experiment?
Precepts
 Precept 1: Nonsatiation and Monotonicity
Costless choice between two alternatives, identical (i.e.
equivalent) except that the first yields more of a reward
medium than the second, the first will always be chosen
(i.e. preferred) over the second, by an autonomous
individual
 Precept 2: Saliency
such rewards must be associated indirectly with the
message actions (or decisions) of experimental subjects
and that they understand this relation
Donhatai Harris
III. How to conduct an experiment?
 Precept 3: Dominance
The reward structure dominates any subjective costs (or
values) associated with participation in the activities of
an experiment.
 Precept 4: Privacy
Each subject in an experiment is given information only
on his/her own payoff alternatives.
 Precept 5: Parallelism
The behaviour of individuals and the performance of
institutions that have been tested in laboratory
microeconomies also apply to non-laboratory
microeconomies where similar cateris paribus
conditions hold
III. How to conduct an experiment?
Experimental Design and Procedure
1) Phases of Economic Experiment


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preliminary phase (experimental design)
pilot experiment
exploratory experiment (actual experiment)
follow-up experiments
Donhatai Harris
III. How to conduct an experiment?
2) Human Subjects
 Student: convenient, low opportunity cost.
 Non-student: increases parallelism, but high
opportunity cost, risk of unknown confounds.
(Minimum of 30 independent observations and Always
invite 20% more than you need)
Recruiting the subjects is key!
 Manual recruitment
 computer-assisted recruitment
Donhatai Harris
Recruiting the subjects
Centre for Research in Microeconomics [CReMic]
Centre for Research in Microeconomics [CReMic]
Experiment session
will appear here
Centre for Research in Microeconomics [CReMic]
Centre for Research in Microeconomics [CReMic]
III. How to conduct an experiment?
3) Experimental Design
 Focus variable(s)  Treatment
 Other variables (Nuisances)  controlled
 between-subject vs. within-subject designs
 ‘session’ = a unit of experiment. An experiment
can have many sessions.
Donhatai Harris
III. How to conduct an experiment?
4) Instructions, Framing, and Anonymity
 Instructions tells subjects what they are asked
to do in the experiment
 Framing: The way in which the instruction is
worded can be distinguished into ‘neutral’ or
‘loaded’ frames.
 Anonymity
Donhatai Harris
III. How to conduct an experiment?
5) Conducting an Experiment
 A step-by-step procedure
 Set up the lab: What Does a Lab Experiment Look
Like?
Computerised experiment
Donhatai Harris
Pen & paper experiment
III. How to conduct an experiment?
Registration
• Print a list of subjects for that session for registration
III. How to conduct an experiment?
Start the experiment
• Welcome statement
• Prepare lab IDs for randomisation
• If more people turn up than needed:
(1) Ask for volunteer to leave and get the show-up fee
(2) If not volunteer, do a random draw (prepare lab IDs for
randomisation with some blank ones)
Donhatai Harris
III. How to conduct an experiment?
During the experiment
 Each participant is asked to pick a computer lab ID
which corresponds to their seats in the lab. The
participants then enter the lab one-by-one.
 The Silent rule: once entered the lab, the participants are
not allowed to communicate to each other (in order to
ensure that they make the decision individually and
privately) and are seated behind a partition.
Donhatai Harris
http://www.iew.uzh.ch/ztree/index.php
Centre for Research in Microeconomics [CReMic]
http://www.iew.uzh.ch/ztree/index.php
Z-tree
Z-leaf
Donhatai Harris
Z-leaf
Z-leaf
Z-leaf
Z-leaf
III. How to conduct an experiment?
z-Tree: basic concepts
 Subjects enter input into screens. Output (parameters,
results etc.) also shown on screens.
 Subjects navigate through different screens in z-Leaf as
they move through “stages” in z-Tree.
 Experimenter controls the experiment through z-Tree and
can monitor what the subjects are doing.
Donhatai Harris
III. How to conduct an experiment?
 Post-experimental questionnaire
 Negative Payments or Bankruptcy
 Data Recording and Analysis
▫ qualitative or descriptive phase
▫ quantitative analysis of treatment effect i.e. ‘does treatment X
affect outcome Y?’
Donhatai Harris
III. How to conduct an experiment?
Internal and external validity
 Internal validity: Do the data permit causal
inferences? Internal validity is a matter of proper
experimental controls, experimental design, and data
analysis.
 External validity: Can we generalize our inferences
from the laboratory to the field?
Donhatai Harris
IV. Experimental Study of Favouritism:
Thailand vs. UK
Donhatai Harris
The Impact of Social Norms on
Favouritism Behaviour
Donna Harris
University of Cambridge
[email protected]
With Benedikt Herrmann (Nottingham) and Andreas Kontoleon (Cambridge)
I. Definition & Research Question
 Definition: Favouritism = Preferential treatment giving to one
person or group at the expense of another.
 Broad research questions:
1) If favouritism creates Pareto inferior outcome, why is it still
observed in many countries around the world?
2) Why do we observe varying degrees of favouritism across
countries?
What is the role of social norms in determining the level of
favouritism within a given society?
II. Related Literature
 Literature on Favouritism: Previous studies have not explained
‘why’ different levels of favouritism are observed in different
countries– most have focused on the ‘effects’ of favouritism.
 Social Norms & Enforcement Mechanisms: Most previous studies
have only focused on one type of norm, such as the norm of
cooperation, or one social group and the enforcement of social
norm within that group, except for Bernhard et al. (2006); Goette
et al. (2006); Gaechter and Herrmann, 2007; Herrmann et al.
(2008).
Specific Research Questions
 What is the social norm regarding favouritism?
 Can the prevalence of a particular norm regarding favouritism
lead to different levels of favouritism across countries?
 The norm which is prevalent  strongly enforced by different
social groups within a society.
 Can different social groups follow different social norms?
In-group bias vs. egalitarianism vs. Out-group Bias Norms
IV. Experimental Design
Allocation Game (Favour game)
7 players, 1 decision-maker, 3 in-group members & 3 out-group members.
T0: No punishment (baseline)
T1: Only the ‘in-group’ members are allowed to punish (cost: punish = 1: 5)
T2: Only the ‘out-group’ members are allowed to punish (cost: punish=1:5)
T3: Only an independent ‘third-party’ is allowed to punish (cost: punish=1:3)
The Choice set: Control for allocation space
Out-group Favouritism
In-group Favouritism
Generalised
Inequity Aversion
Each member of YOUR group
Each member of the OTHER group
Anti-social
preference
Result 1: In-Group Punishment
The threat of in-group punishment increases favouritism in
Thailand but does not have the same effect in the UK.
Result 2: In-group Punishment Behaviour
75% chose not to punish
92% chose not to punish
In Thailand, on average the other in-group members punished the decision-makers
the most when they choose option B and D, while in the UK options C and D get
punished the most.
Result 3: Out-group Punishment
The threat of out-group punishment reduces favouritism and
shifts the allocation decisions towards equitable outcome in the
UK, but not in Thailand.
Result 4: Out-group Punishment Behaviour
48% chose not to punish
61% chose not to punish
In Thailand, on average the out-group members punished the
decision-makers the most when they chose option B , whilst in
the UK options A and B were punished the hardest.
Result 5: Third-Party Punishment
The threat of 3rd party punishment increases favouritism in
Thailand but does not have any impact on favouritism in the
UK.
Result 6: Third-Party Punishment Behaviour
67% chose not to punish
In Thailand, uninvolved third-party punished decision-makers
who chose option A the hardest, whilst in the UK only 1 thirdparty punished - option B.
VI. Concluding Remarks
(1) What is the social norm regarding favouritism?
 There appears to be a strong ‘in-group bias norm’ in Thailand
(collectivist society) which is expected to be enforced within the group
and by the third-party.
 Within the UK, it is not clear what the social norm is within the context
of favouritism:
There is already a high level of in-group favouritism without
expectation of punishment, but ‘in-group bias norm’ does not appear to
be strongly enforced within the group. People appear to be willing to
punish favouritism if they are directly affected by it (out-group), but
not if they are not affected (third-party).
VI. Concluding Remarks (cont.)
(2) Can the prevalence of a particular norm regarding favouritism
lead to different levels of favouritism across countries?
 Possible. Within Thailand, strong in-group bias norm means that the outgroup are passive, even though they are directly affected, whilst the thirdparty is also expected to enforce this norm  No conflicting norm 
favouritism is encouraged  high level of favouritism.
 Within the UK, high level of favouritism is already observed even without
the threat of punishment from the in-group  norm inherence without
enforcement? But out-group provides a counter-mechanism  conflicting
norm  lower level of favouritism.
(3) Can different social groups follow different social norms?
 Seems to be the case for the UK, but not Thailand.
V. Contributions of Experimental
Economics and Future Challenges
Donhatai Harris
V. What has been done & What’s Next?
Summary of Main contributions of
experiments to economics
 The analysis of markets under perfect or imperfect
information e.g. auction, interaction between employer
& employee in the labour market.
 The understanding of individual decision-making (loss
aversion, endowment effect, ambiguity aversion, law of
small numbers, preference reversal, …)
 The study of social interactions and preferences
(altruistic, punishment, trust, fairness, inequality
aversion, …)
Donhatai Harris
V. What has been done & What’s Next?
Some of the important notions in economics have
been challenged by experimental research, in
particular:




preferences are not always stable and
consistent;
the agents do not have perfect knowledge of
their preferences;
they do not always use all the available
information to make decisions.
Self-interest is not the only preference that
drives the individuals’ decisions.
Donhatai Harris
V. What has been done & What’s Next?
 Contribution to institutional design/ public policy
questions.
 Analysis of funding modes of collective goods or
political campaigns.
 Experiments can help in analyzing the agents’
preferences when markets do not exist.
 It also offers academics an innovative teaching tool!
(see Charles Holt, 2006, “Markets, Games, and
Strategic Behaviour).
Donhatai Harris
V. What has been done & What’s Next?
Future directions
 Interaction with psychology & Development of
“behavioural game theory”
 Interaction with anthropology & cross-cultural
experiment
 Interaction with political scientists: voting behaviour &
decision-making in committee.
Donhatai Harris
V. What has been done & What’s Next?
Future direction
 Development of “Neuroeconomics” (brain imaging, EEG,
PET and fMRI) and “physionomics” (skin conductance
measures, heart rate, measures of hormones, study of
pupil dilation).
Opening the “black box of brain activity” (Camerer,
Loewenstein, and Prelec, 2005)
Donhatai Harris
V. What has been done & What’s Next?
Future direction
 The reinforcement of the realism of economic
experiments and the diversification of protocols 
improving “external validity”.
 Field Experiment: Levine and Plott (1978) “A Model of
Agenda Influence on Committee Decisions”, AER/
Harrison and List (2004), “Field Experiments”. Journal
of Economic Literature.
Donhatai Harris
V. What has been done & What’s Next?
Major theoretical and methodological
challenges
 What is the best way to update the standard
theories?
- Should one incorporate social preferences, and non-monetary
sources of motivation in the utility function and where should one
put the limit in the manipulation of this function?
- When do market forces dominate and when do social
preferences dominate?
- When do selfish people contaminate the socially-oriented
subjects?
Donhatai Harris
V. What has been done & What’s Next?
Major theoretical and methodological
challenges
 How to determine what should be the status of agents’
heterogeneity in preferences or abilities ?
 A challenge is that a lab experiment must reproduce a
theoretical model but it must be at the same time able to
mimic the field context reliably.
 How can one interpret the differences revealed by the
comparison of field and lab experiments?
Donhatai Harris
In conclusion…
 Experimental economics constitutes a powerful method
to develop knowledge in economics.
 It helps in identifying empirical regularities and so doing
it inspires new research questions.
 It contributes to the renewal of economic theory by
incorporating emotions, affect and cognition in the
analysis of behaviour.
 Replication is crucial for certifying the robustness of
scientific results from experiments.
Donhatai Harris
Thank you for your attention
Questions & Comments are welcome
Donhatai Harris
[email protected]
Cambridge Behavioural and Experimental Economics Group
(CEBG)
(www.econ.cam.ac.uk/cebeg)