EXPERIMENTAL AND
BEHAVIORAL
ECONOMICS:
SUMMARY
@ECOsummaries
→ 20% discount
1
,Table of contents
Week 1_________________________________________________page 3-4
Week 2_________________________________________________page 5-8
Week 3_________________________________________________page 9-15
Week 4_________________________________________________page 16-19
Week 5_________________________________________________page 20-23
Week 6_________________________________________________page 24-26
Week 7_________________________________________________page 27-32
Week 8_________________________________________________page 33-37
Week 9_________________________________________________page 38-39
Week 10________________________________________________page 40-45
Week 11________________________________________________page 46-46
Disclaimer: class experiment results are from the year 2022 and can vary across different
years.
2
,Week 1 – Introduction
Experimental economics:
Experimental economics:
- Not a distinct field like monetary econ, environmental econ, etc.
= It is an empirical method.
→ Draw causal inferences, make predictions about policies, examine effects of treatments.
Correlation vs. causation:
Example: ‘’Someone finds a vaccine for COVID-19. She injects it into herself and does not
contract COVID-19. Does the vaccine work?’’
→ You cannot tell, you need more research!
Problem illustration:
Notation:
- T = 1 → treated, T = 0 → not treated.
- Y1i = outcome with treatment.
- Y0i = outcome without treatment.
- Treatment effect:
- Counterfactual: what could happen under different conditions
→ What would have happened to the same group of people if they did not receive any
treatment?
→ Problem: often unknown.
→ Solution: 1. Test on more people.
2. Need of a control group.
Economic experiments:
- Use randomization of treatment.
→ Subjects in treatment and control groups have similar characteristics on average.
→ Reliable counterfactual!
- Important: only change 1 thing between treatment and control group to avoid
confounding effects.
- Laboratory experiments: organized session
* Every subject knows it is in the experiment.
* Simple decisions
* Full information provided
* Decisions have real consequences.
* Anonymous
3
,Behavioural economics:
Behavioural economics:
- Neo-classical model: behaviour is irrational.
- Understanding economic decisions of individuals/institutions with social, cognitive and
emotional factors.
- Use of psychology with economic theory combined.
Two systems of cognition:
System 1: intuition
- Fast - Associative
- Automatic - Emotional
- Effortless
System 2: reasoning
- Slow - Rule-governed
- Controlled - Neutral
- Effortful
Overview:
- Reference dependent
- Time inconsistent choice
- Equilibrium / no equilibrium
- Social preferences
4
, Week 2 – Methodology
Economics as an experimental discipline
How experiments can help economics (Davis & Holt, 1993; Friedman & Sunder, 1994):
1. Theory falsification: do people play mixed strategy Nash equilibrium in real life?
2. Applicability of competing theories: when is what theory is better than the other?
3. Robustness: when does the theory not work?
4. Policy advice: experiments provide data for policy advice.
5. Test mechanism: new institutions that are too complex for theory use experiments.
6. Empirical regularities: when there is no accurate theory available.
7. Measure individual characteristics: risk aversion, impatience, beliefs, etc.
8. Simulation: macro experiments.
9. Teaching methods: teach subjects about alternative theories.
Economic experiment:
Experiment: a controlled economic environment in which subjects make decisions that are
being recorded for the purpose of analysis.
Controlled economic environment: subjects together with an institution through which the
subjects interact.
→ Impossible to recreated reality, hence a lab is the best we can do.
Types of decisions:
1. Individual choice
2. Strategic (against another subject)
Economics vs. psychology:
- Different interests:
* Economists focus on economical behavioural with restrictions and institutions.
* Psychologists focus on individual, unrestrained, behaviour.
- Stylistic differences:
* Economists are more theory based and focus on the outcome.
* Psychologists focus more on the process.
- Design and procedures:
* Economists are not allowed to manipulate subjects and lie about the experiment.
* Psychologists can manipulate subjects.
5
BEHAVIORAL
ECONOMICS:
SUMMARY
@ECOsummaries
→ 20% discount
1
,Table of contents
Week 1_________________________________________________page 3-4
Week 2_________________________________________________page 5-8
Week 3_________________________________________________page 9-15
Week 4_________________________________________________page 16-19
Week 5_________________________________________________page 20-23
Week 6_________________________________________________page 24-26
Week 7_________________________________________________page 27-32
Week 8_________________________________________________page 33-37
Week 9_________________________________________________page 38-39
Week 10________________________________________________page 40-45
Week 11________________________________________________page 46-46
Disclaimer: class experiment results are from the year 2022 and can vary across different
years.
2
,Week 1 – Introduction
Experimental economics:
Experimental economics:
- Not a distinct field like monetary econ, environmental econ, etc.
= It is an empirical method.
→ Draw causal inferences, make predictions about policies, examine effects of treatments.
Correlation vs. causation:
Example: ‘’Someone finds a vaccine for COVID-19. She injects it into herself and does not
contract COVID-19. Does the vaccine work?’’
→ You cannot tell, you need more research!
Problem illustration:
Notation:
- T = 1 → treated, T = 0 → not treated.
- Y1i = outcome with treatment.
- Y0i = outcome without treatment.
- Treatment effect:
- Counterfactual: what could happen under different conditions
→ What would have happened to the same group of people if they did not receive any
treatment?
→ Problem: often unknown.
→ Solution: 1. Test on more people.
2. Need of a control group.
Economic experiments:
- Use randomization of treatment.
→ Subjects in treatment and control groups have similar characteristics on average.
→ Reliable counterfactual!
- Important: only change 1 thing between treatment and control group to avoid
confounding effects.
- Laboratory experiments: organized session
* Every subject knows it is in the experiment.
* Simple decisions
* Full information provided
* Decisions have real consequences.
* Anonymous
3
,Behavioural economics:
Behavioural economics:
- Neo-classical model: behaviour is irrational.
- Understanding economic decisions of individuals/institutions with social, cognitive and
emotional factors.
- Use of psychology with economic theory combined.
Two systems of cognition:
System 1: intuition
- Fast - Associative
- Automatic - Emotional
- Effortless
System 2: reasoning
- Slow - Rule-governed
- Controlled - Neutral
- Effortful
Overview:
- Reference dependent
- Time inconsistent choice
- Equilibrium / no equilibrium
- Social preferences
4
, Week 2 – Methodology
Economics as an experimental discipline
How experiments can help economics (Davis & Holt, 1993; Friedman & Sunder, 1994):
1. Theory falsification: do people play mixed strategy Nash equilibrium in real life?
2. Applicability of competing theories: when is what theory is better than the other?
3. Robustness: when does the theory not work?
4. Policy advice: experiments provide data for policy advice.
5. Test mechanism: new institutions that are too complex for theory use experiments.
6. Empirical regularities: when there is no accurate theory available.
7. Measure individual characteristics: risk aversion, impatience, beliefs, etc.
8. Simulation: macro experiments.
9. Teaching methods: teach subjects about alternative theories.
Economic experiment:
Experiment: a controlled economic environment in which subjects make decisions that are
being recorded for the purpose of analysis.
Controlled economic environment: subjects together with an institution through which the
subjects interact.
→ Impossible to recreated reality, hence a lab is the best we can do.
Types of decisions:
1. Individual choice
2. Strategic (against another subject)
Economics vs. psychology:
- Different interests:
* Economists focus on economical behavioural with restrictions and institutions.
* Psychologists focus on individual, unrestrained, behaviour.
- Stylistic differences:
* Economists are more theory based and focus on the outcome.
* Psychologists focus more on the process.
- Design and procedures:
* Economists are not allowed to manipulate subjects and lie about the experiment.
* Psychologists can manipulate subjects.
5
