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Experimental Economics
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Terms in this set (95)
Observational Study
draws inferences from a sample to a population where the independent variable is not under the control of the researcher because of ethical concerns or logistical constraints
Controlled Experiment
is a test where the person conducting the test only changes one variable at a time in order to isolate the results.
Randomized Controlled Experiment
Modern gold standard for identifying treatment effects. People are allocated at random to receive several various treatments.
Repeated Measures
Running trials in the exact same environment
Monetary Incentives
Given to test subjects to motivate them to behave as if they were in a real economic scenario
Experimenter Demand Effects
When subjects try to give the experimenter what they think the experimenter wants
Context
What ideas does the subject have about the experiment? Econ experiments limit contextual cues to avoid demand effects. Another approach is to make context natural, like in a field experiment
Field Experiments
Applying the scientific method to examine something in the real world rather than in the lab
Independent Observations
Try to avoid non-independent observations, the occurrence of one event doesn't change the probability for another
Field experiments
Applying the scientific method to examine something in the real world rather than in the lab
Independent observations
Try to avoid non-independent observations, the occurrence of one event doesn't change the probability for another
Replication
Replication is being able to get the same results multiple times in different experiments. Psychology struggles with this.
Edward Chamberlin
Systematically introduced controlled lab experiments to test classical theory
Vernon Smith
Won the Nobel Prize in 2002 for pioneering work in Experimental Economics
Treatment
What you are changing between subjects in an experiment
Control
The subject or trial you change nothing about, and use as your baseline when you later add treatments
Subject pool
The pool of subjects you have to choose to experiment on
Incentives
Reasons why people behave certain ways, economists will use monetary incentives but there are many others
Sequence effects
potential confounding influences in experiments where subjects are exposed to multiple conditions
Within subjects design
Designed so that you're testing for one outcome across all your subjects
Between subjects design
Designed so that you're testing for differences between subjects
Psychological Biases
Tendencies to think in certain ways that can lead to systematic deviations from a standard of rationality or good judgement
Loss Aversion
Refers to the tendency for people to strongly prefer avoiding losses than acquiring gains
Status Quo Bias
A preference for the current state of affairs. Using the current point in time as status quo, any deviation from that would be a loss for those with status quo bias.
Endowment effect
The hypothesis that people ascribe more value to things simply because they own them
Pit Market
A market where buyers and sellers call out buy bids and sell offers to try to trade with other people on the floor
Double Auction
Buyers and sellers call out prices at which they are willing to trade, auctioneer writes down prices. Buy bids must get higher, sell offers must get lower
Posted-offer auction
When sellers post a buy it or leave it price, with no negotiation
Efficiency (in the context of a market experiment)
Measuring the consumer and producer surplus and comparing that to the maximum surplus
Competitive Market Theory/Perfect Competition (and assumptions)
A market with numerous produces that compete with one another. Buyers and sellers are price takers, the number of market participants is infinite, entry and exit are free, the traded commodity is identical, everybody has complete information, sellers are profit maximizers, and buyers maximize net value
John Nash
American mathematician and economist who developed the Nash Equilibrium theory
Nash Equilibrium (and assumptions)
When no player can become better off by changing their strategy, given the others keep their strategy fixed. Players care only about their own payoffs, not opponent's payoffs or relative payoffs. Players understand the game. Players believe that their opponents care only about their own payoffs, and understand the game. The game is played only one time.
Underline method
The method one side of a matrix will choose knowing what side the opponent will choose
Pure strategy nash equilibrium
When the matrix game picks an outcome for itself that neither player has a reason to deviate from
Pareto optimal/efficient
When there is no other strategy pair that would make one player better off without making someone else worse off
Prisoner's dilemma
Matrix game where hypothetically, two people who commit a crime are arrested. They are each in solitary confinement, and each is offered a bargain to rat on the other. There are Nash Equilibrium, but none that are Pareto-Optimal. Matrix is setup like
Coordination game
Games with multiple pure strategy Nash equilibria where players have to coordinate on an option
Battle-of-the-sexes game-
Matrix game where hypothetically, a couple is choosing date ideas. One wants to go to the movies, one wants to go the opera. They'd rather do something than nothing, but have to coordinate on the same choice. Matrix is setup like
Inspection game
Matrix game where there is a thief and a cop. The cop can either do paperwork or inspect. The thief can either watch TV, or steal. Matrix is setup like
Guessing game (p-beauty contest)
Game where set of players all guess a number in-between 1 and 100. The winner is the one closest to number chosen (p) times 2/3. The Nash Equilibrium will be 0. Provides better support for Nash Equilibrium than matrix games.
St. Petersburg paradox
Hypothetical lottery where you can flip a coin, heads on first flip earn $2, heads on second flip earns $4, heads on flip k earns $2^k. Expected value is infinite, (1+1+1+...+1)
Expected value
Found by multiplying all possible outcomes by their possibilities.
Expected utility
Will show whether you are risk averse or risk loving.
Risk neutral
linear utility of money U(x)=x
Risk averse
Concave utility of money U(x)=x1/2 . Means you are scared of risk
Risk loving
Convex utility of money U(x)=x2
Coefficient of relative risk aversion
U(x)=x1-r where r is the coefficient
Hypothetical bias
arises in studies when a participant reports a willingness to pay that is either higher or lower than what they actually pay using their own money in lab or field experiments
Expected monetary value
Accounts for a dollar figure and a probability associated with various outcomes.
Expected utility theory
Like EMV, but takes also into account a person's risk valuations
Hypothetical vs. Real earnings
When participants are given hypothetical money, they tend to be more generous to others. People are considerably more risk averse when involving real money
Allais Paradox
Experiment using hypothetical percentages and millions of dollars, used to measure risk aversion
Prospect Theory
Alternative to calculating EU, a descriptive theory that takes into account reference dependence, loss aversion, and diminishing sensitivity
Probability weighting
Shows that people overreact to small probability events, but underreact to large probabilities
Mixed Strategy Nash equilibrium (also called mixed equilibrium) -
The connection you find between probabilities that a player will pick an option coupled with that options payout
Best response
The strategy(ies) that produces the most favorable outcome for a player, taken the other players' strategies as given.
Expected payoff
The value expected from a certain choice
T test (paired, unpaired, one sample, two sample) -
Tests the statistical difference between two populations
Chi Squared Test
Intended to test how likely it is that an observed distribution is due to chance.
Time preference
Measures how much people prefer things now as opposed to later
Discount rates
Measured by variable β and adds a discount utility to everything that doesn't happen now. Β=1 is the standard model, β>1 means having present bias
Impatience vs. present bias
Impatience is δ and does not imply irrational time consistency, present bias is β and does imply irrational time consistency
Time consistency
preferences are time consistent if the relative evaluation of preferences does not depend on when the decision maker is asked
Time inconsistency
When the relative evaluation depends on when the decision maker is asked
Extensive Form Games
Games in which player 1 decides, then the player 2 will make his moved based on players 1 decision.
Pareto Optimal
impossible to make any one individual better off without making at least one individual worse off.
Dictator Game
Player 1 (dictator) decides how to split money and player 2 has no say in what happens.
Ultimatum Game
player 1 choses to give 70 dollars, player 2 will decide to accept or deny.
Trust Game
the initial decision maker in a "trust game" decides how much money to pass to the other person. All money passed is increased by a factor, M > 1, and the second mover then decides how much of this to return to the first mover and how much to keep.
Double Blind Procedure
Neither the subject nor the experimenter know who is getting the particular treatment, complete anonymity
Proposer
First player to send a money decision in an ultimatum or dictator game
Respondent
Second player in an ultimatum or dictator game
Backward Induction
Backward induction is the process of reasoning backwards in time, from the end of a problem or situation, to determine a sequence of optimal actions. In game theory, backward induction is a method used to compute subgame perfect equilibria in sequential games
Subgame Perfect Nash Equilibrium
The Nash Equilibrium of a multistage game, shown graphically by highlighting lines on a decision tree
Other Regarding Preferences
Caring about the preferences of others
Altruism
Regarding the preferences of others, "I like it when others do well"
Fairness
Thinking about all players involved and doing what you can to make sure everybody gets payoffs they deserve
Inequality Aversion
Being scared of inequality, wanting your own payoffs and others payoffs to be equal
Reciprocity
Conditional cooperation, "I'll treat you kindly if you do the same to me"
Social Dilemmas
Environments where equilibrium behaviour is not socially optimal
Public Goods
Non-rival, non-exclusive goods like national defense and education
Public Goods Game
When individuals have $$ to divide between group and individual accounts, like game with red and black cards we played in class
Free Rider Problem
When those who benefit from a good do not pay for it
MPCR
Marginal per capita return, higher MPCR means there is a lower cost of contributing to public account as well as higher efficiency, higher the population the lower the MPCR
Pro-social behavior
Behavior that benefits others or society as a whole
Guilt Aversion
Being scared of guilt, not wanting to let other players down
Monopoly
When there is only one firm in a market, monopolist will always maximize profit by TR-TC.
Oligopoly
Multiple firms dominating the market, high barriers to entry
Cournot
When competing firms make the same undifferentiating product and are in competition to produce the profit maximizing quantity
Cournot Theorem
As the number of firms grows larger and larger, the price and quantity produced will come closer and closer to competitive levels.
Asset Markets
Hypothetical markets setup with participants who have ability to buy and sell "stocks" with different dividends and payoffs.
Dividend Yield
The payoff or payoff options of an asset at the end of every round
Fundamental Value
Expected sum of remaining dividends on an asset
Present Value
...
Asset Bubbles
When price > fundamental value, lead to misallocation of capital and can end in painful macroeconomic crises
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