3 - why hasnt economics been experimental all along Flashcards
why did BE emerge
- availability of data
- goes beyond whether predictions are enough
what makes lab experiments generate causal results
- random assingments
- different treatments that only differ in way interest in
how does the mugs and chocolate lab experiment test standard theory
- what is the standard theory
standard theory =
* preferences captured by indifference map - consumption bundles
* constraints
what is endowment theory
phenomenon where individuals items they own more than equivalent items they dont own
- preferences depend on endowment - so there exists other aspects that drive choices
how does endowment theory challenge standard economics
- what is standard theory
standard
* preferences captured by indifference map - consumption bundles
- people exhibit different preferences depending on whether they own something
- emphasises importance of considering psychological factors in economic behaviour
what is the Knetsch mugs and chocolate experiment
what does it test
what is the standard econ assumption
tests if preferences are independent of endowment
standard econ assumption:
* proportion of subjects who choose mug should be the same across 3 groups - if random sampling variation
* because subjects should have same feasible set
Knetsch mugs and chocolate experiment
how does it work
- 2 goods of same value, mugs and chocolates
- subjects dividided into 3 groups:
- given mugs
- given chocs
- allowed to choose - not endowed
- allowed to swap
Knetsch mugs and chocolate experiment
results
and what does this mean
results:
* when endowed - majority of people 90% keep whatever they were endowed with
* when not endowed 50% people choose mugs the other choose chocs
- we have observed endowment effect - there is difference in choices between the groups depending on what they were endowed with
what factors are key to ensure causal impact of endowment
- endowment is only way treatments differ - holding constant all other factors
- random sample
why were economists reluctant to use experiments for so long
- controlled experiments have higher internal validity (reliable conclusions about an effect that did operate in the experiment) but external validity (reliable conclusions about effect that would operate outside the experiment) is questionable
- lots of people thought that experiments were irrelevant to economics
views against lab experiments
- irrelevant to economics
- misleading about other contexts
- unrepresentative - wouldnt apply to field
- behaviour distorted
- people dont understand
what was Friedmans 1953 point of view on lab experiments
- theory models should only be judged by their predictive power - doesnt matter about realistic assumptions
- theories predictive success in field is all that matters
- labs cant explain field phenomena
how does vernon smith show that lab experiments are important to economics
- artificial lab markets can simulate real markets
- lab experiments predict successfully what they were intended to –> Friedman
why is using financial incentives important in experiments
- create real mini economic systems in lab
what are 2 examples of how lab experiements can be important and useful for economics
- lotteries
- markets
- you can observe things more easier in lab than you can in field
