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Experimental Economics: What it Means, How it Works
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What Is Experimental Economics?
Experimental economics is a branch of economics that studies human behavior in a controlled laboratory setting or out in the field, rather than just as mathematical models. It uses scientific experiments to test what choices people make in specific circumstances, to study alternative market mechanisms and test economic theories.
Key Takeaways
- Experimental economics is concerned with studying the efficacy of economic principles and strategies in a laboratory setting with participants.
- Experimental economics is used to help understand the reasoning and factors that influence the functioning of a market.
- Vernon Smith pioneered the field and developed a methodology that allowed researchers to examine the effect of policy changes before they are implemented.
Understanding Experimental Economics
Experimental economics is used to help understand how and why markets function the way they do. These market experiments, involving real people making real choices, are a way of testing whether theoretical economic models actually describe market behavior, and provide insights into the power of markets and how participants respond to incentives—usually cash.
The field was pioneered by Vernon Smith, who won the Nobel Prize in Economics in 2002 for developing a methodology that allows researchers to examine the effects of policy changes before they are implemented to help policymakers make better decisions.
Experimental economics is mainly concerned with testing in a laboratory setting with appropriate controls to remove the effects of external influences. Participants in an experimental economics study are assigned the roles of buyers and sellers and rewarded with the trading profits they earn during the experiment.
The promise of a reward acts as a natural incentive for participants to make rational decisions in their self-interest. During the experiment, researchers constantly modify rules and incentives in order to record participant behavior in changed circumstances.
Smith’s early experiments focused on theoretical equilibrium prices and how they compared to real-world equilibrium prices. He found that even though humans suffer from cognitive biases , traditional economics can still make accurate predictions about the behavior of groups of people . Groups with biased behavior and limited information still reach the equilibrium price by becoming smarter through their spontaneous interaction.
Along with behavioral economics —which has established that people are a lot less rational than traditional economics had assumed—experimental economics is also being used to investigate how markets fail and to explore anticompetitive behavior.
The SEF is a non-profit association aiming to advance scientific research in the area of experimental finance.
The SEF’s most important role is as a loose network, bringing together friends and colleagues across geographic and disciplinary borders. The traits that unite us are openness, curiosity, and the desire to advance our field.
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Journal cooperation
The SEF cooperates with the Journal of Behavioral and Experimental Finance (JBEF) to improve publishing opportunities in experimental finance for regular papers and short papers, but also for registered reports, survey papers and papers which are more explorative in nature. A number of SEF members serve on the editorial board of the JBEF, including the two co-editors-in-chief, SEF President Elena Asparouhova and SEF Managing Director Stefan Palan.
The Journal of Behavioral and Experimental Finance’s quality and impact are evidenced by some of its journal metrics:
- Impact factor: 6.6 (Ranked 8/111 in BUSINESS, FINANCE)
- CiteScore: 9.0 (Ranked 18/302 in FINANCE)
- ABDC Journal List Rank: A
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Experimental Economics
A Journal of the Economic Science Association
- Publishes high-quality papers in any area of experimental research in economics and related fields.
- Offers a platform for interactive discussions on major issues.
- Invites state-of-the-art theoretical and econometric work motivated by experimental data.
- Considers articles with a primary focus on methodology or replication of controversial findings.
- Welcomes experiments conducted in either the laboratory or in the field.
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- Andreas Ortmann,
- Ragan Petrie,
- Arno Riedl,
- Friederike Mengel
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Volume 27, Issue 3
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Sequential search with a price freeze option: theory and experimental evidence.
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Persistence or decay of strategic asymmetric dominance in repeated dyadic games?
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Journal updates
Call for papers - special issue in memory of amnon rapoport: experimental economics.
Guest Editors: David Budescu (Fordham University), Ido Erev (Israel Institute of Technology), Tamar Kugler (University of Arizona), Ramzi Suleiman (University of Haifa), and Rami Zwick (University of California, Riverside)
Deadline for submissions: November 30, 2023
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Please note you do not have access to teaching notes, behavioral finance: insights from experiments i: theory and financial markets.
Review of Behavioral Finance
ISSN : 1940-5979
Article publication date: 8 June 2015
The purpose of this paper, and a companion paper (Duxbury, 2015), is to review the insights provided by experimental studies examining financial decisions and market behavior.
Design/methodology/approach
Focus is directed on those studies examining explicitly, or with direct implications for, the most robustly identified phenomena or stylized facts observed in behavioral finance. The themes for this first paper are theory and financial markets.
Experiments complement the findings from empirical studies in behavioral finance by avoiding some of the limitations or assumptions implicit in such studies.
Originality/value
The authors synthesize the valuable contribution made by experimental studies in extending the knowledge of the functioning of financial markets and the financial behavior of individuals.
- Experimental economics
- Equity premium
- Experimental finance
- Herd behaviour
- Portfolio theory
Duxbury, D. (2015), "Behavioral finance: insights from experiments I: theory and financial markets", Review of Behavioral Finance , Vol. 7 No. 1, pp. 78-96. https://doi.org/10.1108/RBF-03-2015-0011
Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited
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Experimental finance. The goals of experimental finance are to understand human and market behavior in settings relevant to finance. Experiments are synthetic economic environments created by researchers specifically to answer research questions. This might involve, for example, establishing different market settings and environments to observe ...
Experimental Economics: A branch of economics that focuses on individual behavior in a controlled laboratory setting or out in the field. Experimental economics helps to prove or disprove economic ...
1. Introduction. Experimental finance aims to understand individual and market behavior in settings related to finance. Although experiments are a classical tool in many disciplines (ranging from psychology, to medicine, to physics) and are an established method in economics since the turn of the millennium, experiments in Finance were almost ...
Experimental economics is the application of experimental methods [1] to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms.Economic experiments usually use cash to motivate subjects, in order to mimic real-world incentives. Experiments are used to help understand how and why markets ...
Grading structure. 60% - closed book, in-class exam (final class, 90 minutes) 20% - class attendance & participation for each of first three classes. 20% - 2 mini-assignments based around set problems or set cases. - To be submitted individually, each assignment worth 10% (refer also "collaboration", page 7) 4.
Experimental economics allows for the controlled study of markets, trading rules, and the behavior of participants. It enables policymakers to "bench test" competing policy options by comparing the likely outcomes of alternative sets of rules. Most experiments are conducted in a laboratory setting where researchers observe groups of people ...
Experimental finance publications are not only limited to finance journals. Instead, seminal papers in experimental finance that investigated the efficiency of experimental asset markets, such as those by Plott and Sunder, 1982, Plott and Sunder, 1988, and Smith et al. (1988), have been published in a top 5 journal in economics.Therefore, Fig. 3 depicts the development of papers in ...
With an in-depth overview of the past, present and future of the field, The Handbook of Experimental Finance provides a comprehensive analysis of the current topics, methodologies, findings, and breakthroughs in research conducted with the help of experimental finance methodology. Leading experts suggest innovative ways of designing, implementing, analyzing, and interpreting finance experiments.
the time experimental economics rst came into existence and when it nally became an established member of the community? We will start by highlighting the progress of experimental methods in economics, from an area that was thought impracticable, mean-ingless or uninteresting, to an accepted and widely used process in economic research.
What is Experimental Finance? Here. It is the process of establishing a variety of market conditions to test the investing habits of traders in each circumstance. In terms of using experimental finance in a stock market setting, this may be done by setting up trading simulations and applying various theories to see how each trader reacts.
Experimental studies in finance lagged behind experimental studies in economics. Yet, the whole November/December 1999 issue of the Financial Analyst Journal is devoted to behavioral finance and discusses issues such as arbitrage, overconfidence, momentum strategies, market efficiency in an irrational world, and equity mispricing. In this ...
This chapter contains sections titled: Introduction. Theory, Econometrics, and Experiments. The Fundamental Method and Challenge in Experimental Finance. Individual Bias and Aggregate Market Behavior. Insights from Comparing Experimental Psychology and Experimental Economics. Summary and Conclusions. Discussion Questions.
Much of the financial literature focuses on the decisions of auditors and managers and the behavior of investors in negotiation decisions, leading to the publication of a large number of experimental studies in the 1960s and 1970s (Libby et al., 2002).Moreover, the instruments of the experimental method—the ability to observe directly, control, and manipulate variables—are adequate for the ...
Introduction. Experimental finance aims to understand individual and market behavior in settings related to finance. Although experiments are a classical tool in many disciplines (ranging from psychology, to medicine, to physics) and are an established method in economics since the turn of the millennium, experiments in Finance were almost nonexistent until the end of the 1980s.
The SEF cooperates with the Journal of Behavioral and Experimental Finance (JBEF) to improve publishing opportunities in experimental finance for regular papers and short papers, but also for registered reports, survey papers and papers which are more explorative in nature. A number of SEF members serve on the editorial board of the JBEF, including the two co-editors-in-chief, SEF President ...
Experimental data is collected through experiments or controlled studies to test hypotheses, strategies, or investment models. These experiments are designed to provide empirical evidence and insights into financial markets, investment decisions, trading strategies, and economic phenomena. It is valuable because it allows us to understand ...
Overview. Experimental Economics is an international journal serving economists worldwide who utilize experimental methods. Publishes high-quality papers in any area of experimental research in economics and related fields. Offers a platform for interactive discussions on major issues.
The journal welcomes full-length and short letter papers in the area of behavioral finance and experimental finance. The focus is on rapid dissemination of high-impact research in these areas. represent lenses and approaches through which we can view financial decision-making. The aim of the journal is to publish high quality research in all ...
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Finance refers to monetary resources and to the study and discipline of money, currency, assets and liabilities. [a] As a subject of study, it is related to but distinct from economics, which is the study of the production, distribution, and consumption of goods and services.[b] Based on the scope of financial activities in financial systems, the discipline can be divided into personal ...
The Journal of Behavioral and Experimental Finance ( JBEF) is a prominent inter-disciplinary peer-reviewed journal with a focus on the rapid dissemination of high-impact research in the area of behavioral finance and experimental finance. The JBEF epitomizes how we can view financial decision making.
The themes for this first paper are theory and financial markets. , - Experiments complement the findings from empirical studies in behavioral finance by avoiding some of the limitations or assumptions implicit in such studies. , - The authors synthesize the valuable contribution made by experimental studies in extending the knowledge of ...
Beginning in the mid-1990s, there was a resurgence of experimental research addressing an even broader spectrum of financial accounting issues. This paper presents our view of how this new literature has addressed prior criticisms, and how it can continue to shed light on financial accounting questions.