Experimental Economics

The New Institutional Economics (NIE) occupies an important space in the rapidly expanding theory of organization. Traditional testing techniques have only been applied to less complex parts of the NIE. A rich body of evidence generated by the experiences of firms and other organizations lies fallow. The limited domain of traditional testing will persist because of the nature of the central concepts of the NIE, the difficulty posed for integrating transaction cost into an optimizing framework by self-reference, and the particularly (...) wicked manifestations of the Duhem-Quine problem. Experimental economics may add credibility to some components of the NIE but is unlikely to fill the current void. The catchy title, the telling anecdote, and the creative 'fact' have played a disproportionate role in determining the composition of the canonical literature in the NIE. Catalytic steps for developing professional norms governing the marshalling of data generated by different organizations and institutions are discussed in the concluding section. (shrink)

This paper examines the experiment in macroeconometrics, the different forms it has taken and the rules that have been proposed for its proper conduct. Here an ?experiment? means putting a question to a model and getting an answer. Different types of experiment are distinguished and the justification that can be provided for a particular choice of experiment is discussed. Three types of macroeconometric modelling are considered: the Cowles (system of equations) approach, the vector autoregressive model approach and the computational experiment. (...) JEL Classifications: B41, C5, E37. (shrink)

This paper argues that Isaac Levi's account of preference reversals is only a limited success. Levi succeeds in showing that an agent acting in accord with his theory may exhibit reversals. Nevertheless, the specific account that Levi presents in order to accommodate the behavior of experimental subjects appears to be disconfirmed by available evidence.

The contribution that neurobiological data provide us to comprehend the psychological aspects of economic decision-making is critically examined. First, different kinds of correspondences between neural events and mental activities are identified. On the basis of the distinctions made, some recent studies are selected, each of which focuses on a different stage of decision-making and employs a different set of neurobiological data. The thorough analysis of each study suggests that neuro-mental correspondences do not have an evidentiary function but rather a heuristic (...) function, since they can point to the presence of specific differences between phenomena considered homogeneous or to the existence of a relationship between two mental activities which, however, have to be tested by psychological investigations. (shrink)

Gul and Pesendorfer (2008) argue that neuroeconomics is evidentially and explanatorily irrelevant to economics, because neuroeconomics and economics ask different questions and utilize different abstractions. They suggest neuroeconomics is only relevant as a source of inspiration for economists. The present paper accepts their basic premise and asks whether the fact that neuroeconomics and economics ask different questions implies that neuroeconomics is irrelevant. The paper argues that Gul and Pesendorfer overlook some important respects in which neuroeconomics is relevant for economics. First, (...) neuroeconomics can improve singular explanations in economics. Second, and more importantly, it improves our understanding of economic phenomena. And finally, it helps us assess the plausibility of our conjectures concerning economic phenomena. It may be true that neuroeconomics will not revolutionize economics (at least in the short run), but it is more than a source of inspiration. (shrink)

It is sometimes argued that experimental economists do not have to worry about external validity so long as the design sticks closely to a theoretical model. This position mistakes the model for the theory. As a result, applied economics designs often study phenomena distinct from their stated objects of inquiry. Because the implemented models are abstract, they may provide improbable analogues to their stated subject matter. This problem is exacerbated by the relational character of the social world, which also sets (...) epistemic limits for the social science laboratory more generally. (shrink)

A neglected critique of social science laboratories alleges that they implement phenomena different to those supposedly under investigation. The critique purports to be conceptual and so invulnerable to a technical solution. I argue that it undermines some economics designs seeking to implement features of real societies, and counsels more modesty in experimental write?ups. It also constitutes a plausible argument that laboratory economics experiments are necessarily less demonstrative than natural scientific ones. More radical sceptical conclusions are unwarranted.

The adequacy of currently popular accounts of the genetic basis for psychological altruism, including inclusive fitness (kin selection), reciprocal altruism, sociality, and group selection, is questioned. Problems exist both with the evidence cited as supporting these accounts and with the relevance of the accounts to what is being explained. Based on the empathy-altruism hypothesis, a more plausible account is proposed: generalized parental nurturance. It is suggested that four evolutionary developments combined to provide a genetic basis for psychological altruism. First is (...) the evolution in mammals of parental nurturance. Second is the evolution in humans (and possibly a few other species) of the ability to see others as sentient, intentional agents and, thereby, to recognize other's needs, even subtle ones. Third is the evolution in humans of tender, empathic emotions as an important component of parental nurturance. Fourth is the evolution in humans of cognitive capacities that make it possible to generalize tender, empathic feelings and, thereby, altruism beyond offspring. (shrink)

James's Fairness in Trade seeks to offer an account of fair trade that is “internal” to an existing practice he describes as “mutual market reliance.” This paper distinguishes several senses of the distinction between “internal” and “external” that occur in the book and asks how, in its various senses, the distinction shapes and influences judgments about the fairness of the practice.

Previous literature has demonstrated the important role that trust plays in developing and maintaining well-functioning societies. However, if we are to learn how to increase levels of trust in society, we must first understand why people choose to trust others. One potential answer to this is that people view trust as normative: there is a social norm for trusting that imposes punishment for noncompliance. To test this, we report data from a survey with salient rewards to elicit people’s attitudes regarding (...) the punishment of distrusting behavior in a trust game. Our results show that people do not behave as though trust is a norm. Our participants expected that most people would not punish untrusting investors, regardless of whether the potential trustee was a stranger or a friend. In contrast, our participants behaved as though being trustworthy is a norm. Most participants believed that most people would punish someone who failed to reciprocate a stranger’s or a friend’s trust. We conclude that, while we were able to reproduce previous results establishing that there is a norm of reciprocity, we found no evidence for a corresponding norm of trust, even among friends. (shrink)

Using an economic bargaining game, we tested for the existence of two phenomena related to social norms, namely norm manipulation and norm evasion – the deliberate, private violation of a social norm. We found that the manipulation of a norm of fairness was characterized by a self-serving bias in beliefs about what constituted normatively acceptable behaviour, so that an individual who made an uneven bargaining offer not only genuinely believed it was fair, but also believed that recipients found it fair, (...) even though recipients of the offer considered it to be unfair. In contrast, norm evasion operated as a highly explicit process. When they could do so without the recipient's knowledge, individuals made uneven offers despite knowing that their behaviour was unfair. (shrink)

University of Pennsylvania, USA, el322{at}nyu.edu ' + u + '@' + d + ' '//--> One of the most consistent findings in experimental studies of social dilemmas is the positive influence of face-to-face communication on cooperation. The face-to-face `communication effect' has been recently explained in terms of a `focus theory of norms': successful communication focuses agents on pro-social norms, and induces preferences and expectations conducive to cooperation. 1 Many of the studies that point to a communication effect, however, do not (...) further explore whether and to what extent the communication medium affects cooperative behavior. In this article, we ask if pro-social behavior can emerge and survive in computer-mediated environments. We show that, like face-to-face communication, computer-mediated communication also positively affects cooperation in social dilemmas, but cooperation is more difficult to establish and maintain. We argue that the discrepancy between the computer-mediated and the face-to-face communication effects is a consequence of the distinct capabilities of different media to focus agents on pro-social norms and to allow them to develop mutual expectations about future behavior. Key Words: social dilemmas • laboratory experiments • communication • social norms • cooperation • computer-mediated communication. (shrink)

Where should experimental economics go next? This paper uses the literature on inequity aversion as a case study in suggesting that we could profit from tightening up our act.

Our paper “Experimental Economics: Where Next?” contains a case study of Ernst Fehr and Klaus Schmidt’s work in which it is shown that the claims they make for the theory of inequity aversion are not supported by their data. The current issue of JEBO contains two replies, one from Fehr and Schmidt1 themselves, and the other from Catherine Eckel and Herb Gintis. Neither reply challenges any claims we make about matters of fact in our critique of Fehr and Schmidt on (...) inequity aversion, although it is clear that if they could have refuted any single factual sentence then they would have done so. Both replies therefore implicitly concede that the facts quoted in our case study are correct. All the other issues raised in the two replies are just so much dust kicked up to distract attention from the only question that matters: Is it scientific to proceed like Fehr and Schmidt or is it not? Fehr and Schmidt say yes. So do Eckel and Gintis. The implications are quite far-reaching for those like us who think it is obvious that the answer is no. What other claims asserted by the school of Gintis et al can we trust? (shrink)

Neuroeconomic studies are liable to fall into the reverse inference fallacy, a form of affirmation of the consequent. More generally neuroeconomics relies on two problematic steps, namely the inference from brain activities to the engagement of cognitive processes in experimental tasks, and the presupposition that such inferred cognitive processes are relevant to economic theorizing. The first step only constitutes the reverse inference fallacy proper and ways to correct it include a better sense of the neural response selectivity of the targeted (...) brain areas and a better definition of relevant cognitive ontologies for neuroeconomics. This second way also allows increased coherence between the cognitive processes actually involved in neuroeconomics experiments and the theoretical constructs of economics. We suggest means of increasing neural response selectivity in neuroeconomic experimental paradigms. We also discuss how the choice of cognitive ontologies can both avoid implicit reductionist strategies (from economic constructs to neural patterns) and irrelevance, as cognitive processes engaged in experimental tasks may lack immediate bearing on the study of economic behavior. With these joint improvements neuroeconomics can be a progressive science. (shrink)

Neuroeconomics is a recent extension of behavioral economics which aims at uncovering the brain mechanisms and activities that mediate regular and anomalous behaviour. Gul and Pesendorfer have launched a critique against the neuroeconomic research program, based on what they argue is the incommensurability of the theoretical constructs employed by each respective discipline. To respond to their argument we envision and illustrate several "directions of instruction" between neuroscience and economics, and provide counter-examples to their critique. This disciplinary cross-talk suggests that neuroeconomics (...) may play a crucial conceptual and methodological role in fostering the unity of behavioral sciences. (shrink)

Research on moral cleansing and moral self-licensing has introduced dynamic considerations in the theory of moral behaviour. Past bad actions trigger negative feelings that make people more likely to engage in future moral behaviour to offset them. Symmetrically, past good deeds favour a positive self-perception that creates licensing effects, leading people to engage in behaviour that is less likely to be moral. In short, a deviation from a is balanced with a subsequent action that compensates the prior behaviour. We model (...) the decision of an individual trying to reach the optimal level of moral self-worth over time and show that under certain conditions the optimal sequence of actions follows a regular pattern which combines good and bad actions. To explore this phenomenon we conduct an economic experiment where subjects play a sequence of giving decisions (dictator games). We find that donations in the previous period affect present decisions and the sign is negative: participants' behaviour in every round is negatively correlated to what they did in the past. Hence donations over time seem to be the result of a regular pattern of self-regulation: moral licensing (being selfish after altruistic) and cleansing (altruistic after selfish). (shrink)

The contest between rational and behavioral finance is poorly understood as a contest over 'testability' and 'predictive success.' In fact, neither rational nor behavioral finance offer much in the way of testable predictions of improving precision. Researchers in the rational paradigm seem to have abandoned testability and prediction in favor of a scheme of ex post 'rationalizations' of observed price behavior. These rationalizations, however, have an unemphasized relevance for behavioral finance. While behavioral finance advocates may justly criticize rationalizations as unlikely (...) to lead to a science of financial economics with improving predictive power, rational finance's explanatory power plays a key role supporting the limits of arbitrage arguments that make behavioral finance possible. (shrink)

This study examines teaching and learning economics and entrepreneurship through a student-run Montessori middle school store. By designing and managing a school store, students created a "community of practice" to learn economics concepts in their daily environment. Questions guiding this study were: (a) How do students' social-interactions in a Montessori middle school student-operated business demonstrate economics content knowledge? (b) How do students' social-interactions in a Montessori middle school student-operated business demonstrate economics skills? (c) How do students' business roles in the (...) store develop their understanding of economics principles? Findings indicate that: (1) student activities in the school store promoted learning through social interaction; (2) the type and number of business roles a student assumed created opportunities for economic learning; (3) student entrepreneurs expressed specific knowledge of economics concepts, and, (4) students' decision-making and ownership affected behavior. Additionally, features of Kohlberg's (1985) concept of Just Community supported the learning environment. This study can provide social studies teachers and teacher-educators with a model for learning economics (or social studies) concepts through a curricular-based student-run enterprise. (Contains 5 tables.). (shrink)

This paper responds to Gui and Nelson's separate comments on our paper , which analysed sociality in markets as joint commitment to mutual assistance. We argue that our analysis is fundamentally different both from Nelson's analysis (a mixture of self-interested and intrinsic motivations) and from that provided by theories of warm glow or guilt aversion, as discussed by Gui. We agree with Gui that, in initiating and maintaining cooperative relationships, individuals sometimes incur personal costs to benefit others without any certainty (...) of reciprocation, but we argue that the intentions underlying such actions are cooperative rather than self-sacrificing. (shrink)

The purpose of this paper is to show how the degree of experimental validity of scientific procedures is crucially involved in determining two typical pragmatic modes in science, namely, the preservation of useful procedures and the disposal of useless ideas. The term 'pragmatic' will here be used following Schurz's characterisation of being internally pragmatic, as referring to that which proves useful for scientific or epistemic goals. The first part of the paper consists in a characterisation of the notion of experimental (...) validity. The second part is focused on several historical examples illustrating how the above pragmatic modes relate to the question of experimental validity. The Michelson-Morley experiment is presented as a case of a highly valid and useful experiment preserved through the development of different theories (like, on the one hand, the ether theory, upheld by Fitzgerald and Lorentz, and, on the other hand, Einstein's special theory of relativity). The concept of caloric will be discussed as an example of an idea that was discarded once it became useless, after heat was understood as a form of energy within the new frame provided by the kinetic theory of heat towards the middle of the 19th century. (shrink)

The goal of neuroeconomics is a mathematical theory of how the brain implements decisions, that is tied to behaviour. This theory is likely to show some decisions for which rational-choice theory is a good approximation (particularly for evolutionarily sculpted or highly learned choices), to provide a deeper level of distinction among competing behavioural alternatives, and to provide empirical inspiration for economics to incorporate more nuanced ideas about endogeneity of preferences, individual difference, emotions, endogeneous regulation of states, and so forth. I (...) also address some concerns about rhetoric and practical epistemology. Neuroscience articles are necessarily speculative and the science has proceeded rapidly because of that rhetorical convention. Single-study papers are encouraged and are necessarily limited in what can be inferred, so the sturdiest cumulation of results, and the best guide forward, comes in review journals which compile results and suggest themes. The potential of neuroeconomics is in combining the clearest experimental paradigms and statistical methods in economics, with the unprecedented capacity to measure a range of neural and cognitive activity that economists like Edgeworth, Fisher and Ramsey daydreamed about but did not have. (shrink)

Focusing on the work of Friedrich von Hayek and Vernon Smith, we discuss some conceptual links between Austrian economics and recent work in behavioral game theory and experimental economics. After a brief survey of the main methodological aspects of Austrian and experimental economics, we suggest that common views on subjectivism, individualism, and the role of qualitative explanations and predictions in social science may favour a fruitful interaction between these two research programs.

Neuroeconomics is a research programme founded on the thesis that cognitive and neurobiological data constitute evidence for answering economic questions. I employ confirmation theory in order to reject arguments both for and against neuroeconomics. I also emphasize that some arguments for neuroeconomics will not convince the skeptics because these arguments make a contentious assumption: economics aims for predictions and deep explanations of choices in general. I then argue for neuroeconomics by appealing to a much more restrictive (and thereby skeptic-friendly) characterization (...) of the aims of economics. (shrink)

To understand the human capacity for psychological altruism, one requires a proper understanding of how people actually think and feel. This paper addresses the possible relevance of recent findings in experimental economics and neuroeconomics to the philosophical controversy over altruism and egoism. After briefly sketching and contextualizing the controversy, we survey and discuss the results of various studies on behaviourally altruistic helping and punishing behaviour, which provide stimulating clues for the debate over psychological altruism. On closer analysis, these studies prove (...) less relevant than originally expected because the data obtained admit competing interpretations – such as people seeking fairness versus people seeking revenge. However, this mitigated conclusion does not preclude the possibility of more fruitful research in the area in the future. Throughout our analysis, we provide hints for the direction of future research on the question. (shrink)

We argue that neuroeconomics should be a mechanistic science. We defend this view as preferable both to a revolutionary perspective, according to which classical economics is eliminated in favour of neuroeconomics, and to a classical economic perspective, according to which economics is insulated from facts about psychology and neuroscience. We argue that, like other mechanistic sciences, neuroeconomics will earn its keep to the extent that it either reconfigures how economists think about decision-making or how neuroscientists think about brain mechanisms underlying (...) behaviour. We discuss some ways that the search for mechanisms can bring about such top-down and bottom-up revision, and we consider some examples from the recent neuroeconomics literature of how varieties of progress of this sort might be achieved. (shrink)

This paper distinguishes the base domain of an economic theory (in which predictions are relatively unambiguous) from, respectively, the domains of intended application and of legitimate testing; it argues that the domain of legitimate testing is not generally restricted to that of intended application; and discusses the obligations on researchers imposed by a position that presumes experimental environments in the base domain of a theory to provide legitimate test, unless there is compelling reason to expect behaviour in the domain of (...) intended application to conform more closely to the theory. Experimental tests of choice theory are discussed as an example. (shrink)

Numerous accounting and economics research studies employ an experimental research method requiring student participants to make representations about an individual characteristic (e.g., ability, cost) that provides a basis for payment of cash rewards. In response, many participants intentionally misrepresent the nature of that characteristic to receive a greater reward. Typically, such studies are deemed to be either exempt from review by institutional review boards (IRBs) or subject only to an expedited review. Moreover, investigators seldom debrief participants, purportedly to avoid contamination (...) of the participant pool. The authors question the ethics of inducing strategic misrepresentation and rewarding fraudulent behavior without appropriate debriefing. A theoretical framework of cognitive ethical development indicates that such research methods can be harmful to student participants. Furthermore, principles of operant conditioning suggest that the rewards reinforce fraudulent behavior. It is recommended that research studies inducing strategic misrepresentation should not be exempt from IRB review and should be required to include desensitization procedures for debriefing participants. (shrink)

Human beings are highly irrational, at least if we hold to an economic standard of ‘rationality’. Experimental economics studies the irrational behavior of human beings, with the aim of understanding exactly how our behavior deviates from the Homo economicus, as ‘rational man’ has been called. Insofar as philosophical theories depend upon rationality assumptions, experimental economics is the source of both problems and (at least potential) solutions to several philosophical issues. This article offers a programmatic and highly biased survey of some (...) of these issues, with the hope of convincing the reader that experimental economics is well-deserving of careful study by philosophers. (shrink)

Is there more to? good science? than explaining novel facts? Social interaction within scientific communities plays a pivotal role in defining acceptable research practices. This article explores the connection between research outcomes and the socio-cultural environment they are constructed in by developing an agent-based computational model of scientific communities. Agent-to-agent interaction is added to a system of knowledge production inspired by the work of Lakatos on scientific research programs as an important factor guiding the actions of researchers. Simulation results show (...) that early in scientific inquiry, when there are new phenomena to explain, the research community is fragmented and scientists prefer to rely on their own talents in conducting research. Over time, consensus emerges in the form of a dominate research program which utilizes a mixture of past and concurrent approaches. This result illustrates Kuhn's notion of the rise and fall of scientific paradigms. (shrink)

According to John Searle's theory of human ontology, intentional mental states such as beliefs and wants rely on non-intentional, Background, dispositions to produce rational behaviour. The distinction between intentional and non-intentional states is used as the basis on which to understand the various conceptions of human agency to be found in behavioural finance. The agent of behavioural finance is characterized in terms of three sets of psychological traits: prospect theory, heuristics and mental accounting. These are examined from a Searlean perspective (...) and shown to rely on the interplay between various reflected upon and non-reflected upon elements, in keeping with the Searlean human ontology previously considered. A number of implications are drawn from these findings. (shrink)

In two experiments, we demonstrate that intentional action intuitions vary as a function of whether one brings about or observes an event. In experiment 1a (N?=?38), participants were less likely to judge that they intended (M?=?2.53, 7 point scale) or intentionally (M?=?2.67) brought about a harmful event compared to intention (M?=?4.16) and intentionality (M?=?4.11) judgments made about somebody else. Experiments 1b and 1c confirmed and extended this pattern of actor-observer differences. Experiment 2 suggested that these actor-observer differences are not likely (...) to occur when participants are asked to ?imagine? being an actor. We argue that these results challenge the substantial philosophical and empirical reliance on hypothetical thought examples about intentional action. Our data offer new and necessary methodological avenues for understanding folk intentional action intuitions. (shrink)

Neuroeconomics has found no definitive role in the explanation of consumer choice and its undeveloped philosophical basis limits its attempt to explain economic behaviour. The nature of neuroeconomics is explored, especially with respect to what it reveals about the valuation of alternatives, choice and emotion. The tendency of human consumers to discount future rewards illustrates how behavioural and neuroscientific accounts of choice contribute to psychological explanations of choice and the issues this raises for both routine everyday choices and more extreme (...) compulsions. Central to this is the phenomenon of matching in which consumers tend to select the immediately larger or largest reward and the neurophysiological and behavioural bases of this choice. Recognition that rewards are evoked by reinforcement contingencies and that the rewards themselves engender emotional responses via classical conditioning enhances understanding the contribution of neurological activity to the explanation of consumer behaviour. It is argued that neuroeconomics can play a vital explanatory role by providing an evolutionarily consistent warrant for the ascription of intentionality. The Behavioural Perspective Model is used as a template for investigations of consumer choice that lead to iterative theoretical development, forming the basis of a neurophilosophy in which neuroeconomics can find a decisive role. (shrink)