Experimental economics

The economy pilot is a technique that applies experimental methods in economics. Thus, it seeks to propose new theories or contrast existing ones.

In other words, experimental economics consists in carrying out laboratory experiments. This, with the objective of sustaining or questioning economic theories.

This branch of the economy is distinguished by not only relying on the observation of the object of study (people’s decisions), but by conducting tests with them in controlled environments.

Characteristics of experimental economics

Among the most important characteristics of experimental economics we can mention:

  • Its main representative is Vernon Smith, who won the 2002 Nobel Prize. This, by developing a methodology that allows researchers to analyze the effects of an economic policybefore implementing it. Thus, the idea is that governments can make better decisions.
  • It represents a break with respect to the conception that only basic sciences such as biology or physics can apply the experimental method.
  • It is a branch of the economy that has developed mainly in the last two decades.
  • For economist Ken Binmore, experiments applied to economics must follow certain criteria. These are, for example, that the decision problem is simple, that the respondent has a reasonable time to give an answer, among others.

Advantages of experimental economics

Among the advantages of experimental economics, the following stand out:

  • It allows empirically contrasting if economic theories are fulfilled in reality.
  • It is a method that gives the opportunity to analyze more closely the decisions of individuals.
  • It allows to reproduce the assumptions and the operation of the economic models. Thus, it can be used, for example, to estimate the demand function of consumers.
  • The person or entity conducting the experiment can design a test that answers their specific questions. Based on this, it will define the test parameters. These are, for example, the options among which the respondent will have to choose, the environment where the decision will be made, the response time, among others.
  • It allows preliminary analysis of the effects of a public policy, for example, within a community. Thus, if the results are good, the measure can be extended throughout the country.

Disadvantages of experimental economics

However, experimental economics also has some disadvantages such as the following:

  • Experiment participants may have biased behavior, seeking a positive assessment, and moving away from what would be a real situation. That is to say, the respondent may be making a decision only to appear intelligent or kind to the person conducting the survey, for example (This could be solved by ensuring the anonymity of the people consulted).
  • Individuals change their behavior according to the context. Thus, it is difficult to replicate reality in an experiment because a decision may vary, for example, depending on the location where the purchase is made. In some stores perhaps the consumer is willing to pay more because he is confident in the quality of the products.
  • The pollster may be limited by his own biases, even unconsciously. In that case, he will interpret the results of the study based on preconceived ideas.
  • As a social science, economics studies human behavior and this can be unpredictable in certain situations.

Example

Experimental economics could be applied in public policies, as mentioned above. For example, if a government wants to approve a new subsidy to public schools to improve their quality of education. Then, a pilot project is implemented in a specific location.

Subsequently, based on the results of the experiment, the authorities decide whether the program should be extended to the entire country. This would happen, for example, if the vast majority of study centers that access the subsidy manage to improve the performance of their students.

by Abdullah Sam
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