What is experimental economics?
Experimental economics is perhaps the most exciting methodological innovation in economics in recent times. Economists conduct experiments for the same reason physicists or chemists do: To very carefully study something under controlled and clean laboratory conditions. The only difference is that the subject matter is not a subatomic particle or a chemical substance but human decision making behavior. Hence, experimental economists confront people with decision problems and then observe what they do. Importantly, these tasks are not hypothetical: The choices that the subject volunteers make have real pecuniary consequences for them; there is real money on the table.
In experimental economics a wide range of choice problems is considered, inspired by fundamental economic questions. For example: How do people choose when they face situations characterized by ‘risk’ where very good or very undesirable outcomes may occur? Under what circumstances and to what extent do concerns for fairness or status affect economic decisions? What exactly are these concerns about and how robust are they? To what extent and in what ways do people reason strategically? How do you get a competitive market? What are the most likely outcomes in different bargaining situations? The experimental approach has turned out to be a very successful tool to improve our understanding of such issues.
Experiments enable researchers to do things that are difficult to achieve with traditional analyses of field data. For example, they can explore counterfactuals (“what would happen if…”), evaluate precisely how close actual outcomes (e.g. observed prices) are to desirable outcomes (e.g. efficient prices), and they can separate cause and effect. In this way experimental economics complements field data research and has become an important source of information for improving economic theories. Sometimes, economists even run field experiments in an attempt to combine advantages of field and laboratory research.
Experimental research can party also be put to direct practical use as it allows economists and decision makers in firms and organizations to examine the likely consequences of new rules and regulations before these are implemented in practice. Examples for these kinds of ‘wind tunnel’ experiments include the design of markets, better rules for allocating scarce resources, effective incentive schemes, novel formats for auctions and voting mechanisms or the development of more successful mechanisms to collect contributions for charitable purposes.
But the most significant and intriguing contributions of experimental economics relate to elementary questions about the very foundations of economic theory. Experiments make it possible to examine and scrutinize very rigorously the true nature of how people make decisions in economic contexts. As it turns out some of the findings from experimental research are not always convenient for economists. For instance, they raise serious questions about the legitimacy of the traditional homo economicus assumption, even as a rough approximation of actual behavior. Over the years this has already triggered an ongoing gradual shift in the way economic models are constructed and justified. A debate has begun regarding the question whether economic models should routinely incorporate more empirically sound assumptions. In this way experimental research has contributed to an exciting renewal of the entire field of economics.
Interested? The Department of Economics at the University of Mannheim offers various courses in experimental and behavioral economics at the bachelor and master level. Furthermore, the department runs a dedicated research lab in which experimental studies are conducted regularly: mLab.