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THE HANDBOOK OF EXPERIMENTAL ECONOMICS Edited by John H. Kagel and Alvin E. Roth is published by Princeton University Press and copyrighted, (c) 1995, by Princeton University Press. All rights reserved. This text may be used and shared in accordance with the fair-use provisions of US copyright law, and it may be archived and redistributed in electronic form, provided that this entire notice is carried and provided that Princeton University Press is notified and no fee is charged for access. Archiving, redistribution, or republication of this text on other terms, in any medium, requires the consent of Princeton University Press.

Early reviews (from the bookjacket...) by Ken Binmore, Robert Gibbons, Daniel Kahneman, Richard Thaler, and Ariel Rubinstein.

This Handbook is the work not only of many years, but also of many hands, by no means all of whom are authors of the chapters. In order to invite the maximum amount of feedback to the author of each chapter, a three day conference was convened in Pittsburgh in June of 1990, at which each author presented an extended outline of his proposed chapter. Investigators from every major center of experimental economics at the time were invited to attend, and most of these centers were in fact represented 2 . The discussions were lively, sometimes even heated. Each author subsequently circulated the various versions of his chapter widely to both experimenters and others interested in the particular topic area, and received many comments and suggestions. Indeed, the pace of experimentation was sufficiently rapid during the time that the chapters were being written that revisions were often required to take account of recent developments, sometimes developments that had been initiated by the earlier discussions.

The capstone of this effort came in January of 1994 when the (virtually) final chapters were presented at the annual meeting of the American Economic Association, in Boston.

This Handbook has eight chapters. Every one except the first of these surveys an area of economics in which there has been a concentration of experiments. The first chapter, in contrast, is meant to serve as an introduction to experimental economics as a whole. In our editorial discussions with the chapter authors, they were told that they were free to write each chapter under the assumption that readers would have read the Introduction. Thus each author was free to focus each chapter as sharply as seemed appropriate.

One suggestion that we received more than once during the course of this project was that the Handbook should include a chapter on methodology, which would tell people how to do experiments. We have not done this. Our view is that a better way to learn how to design and conduct experiments is to consider how good experiments grow organically out of the issues they are designed to investigate, and the hypotheses among which they are designed to distinguish. For this reason, we asked each author to address methodological issues that were important for the experiments being discussed 3 .

One of the pleasures of participating in this project has been that it has afforded us the best seats from which to observe one of the most exciting games in town. New centers of experimental economics have sprung up continually while this work was underway, and the interaction between theorists and experimenters has increased apace. Indeed, one of the special pleasures of finally finishing this project is that it is clear that in only a few more years, a single volume will no longer be able to do even the rough justice that we manage here, to such a rapidly growing area of economic research.

March 1994 Pittsburgh, PA.

1. This volume thus has a very different, although complementary purpose to the earlier volume Laboratory experimentation in economics: Six points of view (Alvin E. Roth, editor, Cambridge University Press, 1987). In that volume, six investigators with different approaches to experimentation (John Kagel, Charles Plott, Alvin Roth, Reinhard Selten, Vernon Smith, and Richard Thaler) were each asked to describe work that illustrated their own approach. In this Handbook, in contrast, the authors were asked to describe how series of experiments are mediated by and mediate the different approaches of different investigators.

2. Although we failed to preserve a complete list of attendees, some of whom only attended for a day, the following list is nearly complete: John O'Brien (Carnegie-Mellon University), Colin Camerer (University of Pennsylvania, now at California Institute of Technology), Robin Dawes (Carnegie-Mellon University), Robert Forsythe (University of Iowa), Glenn Harrison (University of South Carolina), John Hey (University of York), Elizabeth Hoffman (University of Arizona, now at Iowa State University), Charles Holt (University of Virginia), John Kennan (University of Iowa, now at Wisconsin), John Ledyard (California Institute of Technology), Dan Levin (University of Houston), Graham Loomes (University of York), Jack Ochs (University of Pittsburgh), Vesna Prasnikar (University of Pittsburgh, now at University of Ljubljana and Northwestern University), Tatsuyoski Saijo (University of Tsukuba), Andrew Schotter (New York University), Leo Simon (UC Berkeley), Vernon Smith (University of Arizona), Sanjay Srivastava (Carnegie-Mellon University), Shyam Sunder (Carnegie-Mellon University), Richard Thaler (Cornell University, now at Chicago), John Van Huyck (Texas A&M University), and James Walker (University of Indiana). Regrettably no one from the active German (then West German) group of experimenters was able to accept our invitation.

3. Readers with a methodological inclination might keep an eye out for the following kinds of issues: the role of monetary incentives on behavior, demand induced effects, subject pool effects, inducing risk preferences (the binary lottery technique), techniques for inducing infinite horizon games, effects of subject experience, within versus between group designs, and abstract versus concrete problem representation (to name some of the issues that appear in more then one chapter).

• 1. Individual Choice, and the Wallis-Friedman Critique
• 2. Game-theoretic Hypotheses
• 3. Industrial Organization
• B. The 1960's to the present
• II. The Uses of Experimentation
• 1. The Prisoner's Dilemma a.Experiments versus simulations: A methodological digression
• 2. The Free Rider Problem in Public Goods Provision
• 1. Coordination and coordination failure
• 2. Learning and adaptation
• 1. Nash's model of bargaining
• 2. Controlling for unobserved risk posture: binary lottery payoffs
• 3. Information in bargaining
• 4. Risk aversion in bargaining
• 1. Repeated double auctions with stationary parameters
• 2. Some policy-oriented comparisons of market rules
• 3. Information aggregation: Markets as forecasters
• 1. The winner's curse
• a. Controlling incentives: A methodological digression
• a. Alternative theoretical directions
• b. Market behavior
• 2. Other choice phenomena
• 3. Why haven't these demonstrated anomalies swept away utility theory?
• a. The BDM procedure for measuring reservation prices
• b. Controlling preferences with monetary payoffs
• (1) Preferences and probabilities: An Historical Digression on Binary Lotteries and Related Experimental Designs
• d. To control or not to control? Costs and benefits

Bibliography

• A. A Simple Public Goods Experiment (LI>B. The Art of Experiment: Sensitivity and Control
• C. The Language of Experiment: Mechanisms and Environments
• D. The Range of Public Goods Environments
• E. What Is and Is Not to Be Surveyed
• A. Bohm: Estimating Demand
• B. Dawes et al.: Social Dilemmas
• C. Marwell et al.: The Free-Rider Problem
• D. Economists Begin to React
• E. Issac et al.: Systematic Study by Economists
• A. Thresholds and Provision Points
• B. Experience, Repetition and Learning
• 1. Marginal Payoffs and Rebates
• 3. Communication
• 1. Environment
• 2. Systematic
• 3. Institutional
• E. Unknown Effects
• IV. Final Thoughts

Appendix Notes Bibliography

• A. Adaptive Learning Processes and Rational Expectations Equilibria
• B. The Path or Prices When the Rate of Growth of the Money Stock Is Zero
• C. Price Inflation with a Growing Money Stock
• D. Sunspots
• A. Payoff Dominance, Security and Historical Precedent
• B. The Relevance of Dominated Strategies
• C. Influencing Equilibrium Selection
• III. Experiments in Decentralized Matching Environments: Games with Multiple Optimal Equilibria
• IV. Concluding Remarks

Notes Bibliography

• A. Unstructured Bargaining Experiments
• 1. An Initial Exchange of Views
• 2. A Larger Experimental Design
• a. Are Players "Trying to Be Fair"?
• a. Distinguishing between Alternative Hypotheses
• b. A Cross-Cultural Experiment
• A. The Frequency of Disagreements and Delays
• a. The Uncontrolled Social Utility Hypothesis
• b. The Communications Hypothesis
• 2. A New Experiment
• 3. Some Further Experiments
• 4. Recapitulation of the Methodological Issues
• 1. Nonstrategic Models
• a. Complete Information Models
• b. Incomplete Information Models
• c. A Digression on the Strategy Method
• D. Deadlines
• I. Overview
• II. Beginnings
• A. Experiments That Evaluate Behavioral Assumptions
• B. Tests for Sensitivity to Violations of Structural Assumptions
• C. Searching for Empirical Regularities
• A. Instructions
• B. Design Considerations
• A. Posted Prices
• B. Uniform Prices
• C. One-Sided Sequential Auctions
• D. Double Auctions
• E. Decentralized Negotiations
• F. Discounting
• G. Other Institutions
• H. Disadvantages of the Cournot Quantity-Choice Institution
• A. Monopoly
• B. Decentralized Regulatory Proposals
• C. Potential Competition as a Regulator: Market Contestability
• D. Predatory Pricing and Antitrust Remedies
• A. Definitions of Market Power
• B. Market Power in Double Auctions
• C. Market Power in Posted-Offer Auctions
• A. Repetition with Different Cohorts: Experience
• B. Multiperiod Repetition with the Same Cohort
• C. Pure-Numbers Effects and the Ability to Punish
• D. Communication
• E. Contractual Provisions
• A. Product Quality, Asymmetric Information, and Market Failures
• B. Spatial Competition
• C. Vertically Related Markets
• A. Field Data from Financial Markets
• B. Designing Experimental Asset Markets
• C. Dissemination of Information
• D. Aggregation of Information
• E. Market for Information
• II. Futures and State-Contingent Claims
• III. Bubbles and False Equilibria
• A. Adjustment Path
• B. Variables That Transmit Information
• C. Learning Sequences
• D. Aggregate Uncertainty
• E. Role of Arbitrage
• F. Generation of Bids and Asks
• A. Variance Bound Tests
• B. Arbitrage Relationships
• A. Trading Suspensions and Price Change Limits
• B. Double Auction versus Call Market
• C. Specialist Privileges and Book Display
• D. Control of Speculative Bubbles
• E. Bid-Ask Spread
• F. Off-Floor and Block Trading
• VII. Laboratory Modeling of Asset Markets

Introduction

• A. Experimental Procedures
• 1. Tests of the Strategic Equivalence of First-Price and Dutch Auctions
• 2. Tests of the Strategic Equivalence of Second-Price and English Auctions
• 1. Effects of Changing Numbers of Bidders
• 2. Uncertainty Regarding the Number of Bidders
• D. Auctions with Affiliated Private Values
• E. Effects of Price Information in Private Value Auctions
• F. Learning, Adjustment Processes, and Cash Balance Effects in First-Price Private Value Auctions
• 1. Risk Aversion and CRRAM As Applied to Single Unit First-Price Auctions
• 2. The Flat Maximum Critique
• 3. Risk Aversion and Overbidding in Related Environments
• 4. Using the Binary Lottery Procedure to Control for Risk Aversion
• 1. First-Place Sealed Bid Auctions
• 2. Limited Liability and "Safe Havens"
• 3. Second-Place Sealed Bid Auctions
• B. More Winner's Curse: English Auctions and First-Price Auctions with Asymmetric Information
• 1. The Winner's Curse in Bilateral Bargaining Games with Asymmetric Information
• 2. The Winner's Curse in "Blind Bid" Auctions
• 3. Lemons and Ripoffs: The Winner's Curse in Markets with Quality Endogenously Determined
• D. Learning and Adjustment Processes in Markets with a Winner's Curse
• A. Collusion
• 1. Direct Comparisons between Laboratory and Field Data
• 2. Differences in Structure between Laboratory and Field Auctions
• C. Two-Sided Auctions
• D. Other Auction Studies

Detailed table of contents of chapter 8:

• 1. Why Study Errors in Decision Making?
• B. Two Controversies: Methods and Implications
• C. A Map and Guidebook
• 1. Scoring Rules
• 2. Confidence Intervals
• B. Perception and Memory Bases
• 1. Underweighting of Base Rates
• 2. Underweighting on Likelihood Information (Conservatism)
• 3. The Law of Small Numbers and Misperceptions of Randomness
• 4. Market Level Tests of Representativeness
• D. Confirmation Bias and Obstacles to Learning
• E. Expectations Formation
• 1. False Consensus and Hindsight Bias
• 2. Market Level Tests of Curse of Knowledge
• G. The Illusion of Control
• H. Judgment: Summary and New Directions
• 1. Notation and a Diagram
• 2. The Axioms
• 1. Three Controversies
• 2. Initial Tests
• 1. The Allais Paradoxes
• 2. Process Violations
• 3. Prospect Theory
• 4. Elicitation Biases
• 1. Predictions of Generalized EU Theories
• 2. Empirical Studies Using Pairwise Choices
• 3. Empirical Studies Measuring Indifference Curves
• 4. Empirical Studies Fitting Functions to Individuals
• 5. Cross-Species Robustness: Experiments with Animals
• 6. Some Conclusions from Recent Studies
• 7. Investments in Risky Assets
• 1. The Ellsberg Paradox
• 2. Conceptions of Ambiguity
• 3. Empirical Tests
• 4. Formal Models
• 5. Applications to Economics
• F. Choice over Time
• G. Process Theories and Tests
• 1. Framing Effects
• 2. Lottery Correlation, Regret, and Display Effects
• 3. Compound Lottery Reduction
• 1. New Evidence of Preference Reversal
• 2. Arbitage and Incentives
• 3. Reversals and Markets
• 4. Social Comparisons and Reversals
• 5. Some Conclusions about Preference Reversals
• 1. Market Experiments
• 2. Explanations Based on Experimental Artifacts
• 3. Endowment Effects: Some Psychology and Implications
• 1. Search for Wages and Prices
• 2. Search for Information
• L. Choice: Summary and New Directions

Short reviews

--from the hardcover bookjacket:

"I wish every economist and economics graduate student would read this book. Those who are considering running experiments should be forced to; this is a bible in how to run good experiments. Every chapter is amazingly comprehensive and has been written by a true expert in the field. But economists who would never dream about running an experiment can benefit from reading this just as much. The beauty of experiments is that they force theorists to think carefully about their theories." Richard Thaler, Cornell University

"This Handbook surveys one of the most important developments in economics in the last decade, the flowering of experimental economics. Led by two of the leaders of current economic theory and experimental economics, an impressive group of researchers provides the reader with an excellent up-to-date overview of one of the most fascinating and promising areas of current economic research." Ariel Rubinstein, Tel Aviv University and Princeton University

"The Handbook is not only a contribution to experimental economics, it is a major contribution to social science. It successfully combines the rigor and clarity of economic analysis with a commitment to open-minded examination of data, and a refreshing willingness to question dogma. Every student of human choice and action will find this text useful." Daniel Kahneman, The Woodrow Wilson School of Public and International Affairs, Princeton University

"Experimental economics comes of age with this volume. At last the dust begins to clear, and it becomes possible to confront theory with coherent and reliable laboratory data." Ken Binmore, University College, London

"This Handbook heralds the emergence of experimental economics as a field within economics. Several chapters emphasize that strong connections are developing to such fields as industrial organization and macroeconomics. Just as important, however, the Handbook may open a dialogue with the legions of researchers in other disciplines, including organizational behavior, political science, psychology, and sociology, who also conduct experiments to improve their understanding of human behavior." Robert Gibbons, Johnson Graduate School of Management, Cornell University

--and from the paperback book jacket:

"This book is impressive for the clarity, depth, and informativeness of its surveys. The focus on series of experiments is very instructive... One can learn a lot from the issues debated, the methodological digressions, and the many suggestions for further research... This is a great book that is whole-heartedly recommended." F. van Winden, The Journal of Economics

"The book provides not only a comprehensive and deep review of major areas of experimental research, but it is also exceptionally intellectually stimulating and insightful for theoretical economists as well as those who are interested in more immediate policy issues." Katerina Sherstyuk, Economic Record

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Experimental Economics

Douglas D. Davis

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Economics & Finance

• Douglas D. Davis and Charles A. Holt

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A small but increasing number of economists have begun to use laboratory experiments to evaluate economic propositions under carefully controlled conditions. Experimental Economics is the first comprehensive treatment of this rapidly growing area of research. While the book acknowledges that laboratory experiments are no panacea, it argues cogently for their effectiveness in selected situations. Covering methodological and procedural issues as well as theory, Experimental Economics is not only a textbook but also a useful introduction to laboratory methods for professional economists. Although the authors present some new material, their emphasis is on organizing and evaluating existing results. The book can be used as an anchoring device for a course at either the graduate or advanced undergraduate level. Applications include financial market experiments, oligopoly price competition, auctions, bargaining, provision of public goods, experimental games, and decision making under uncertainty. The book also contains instructions for a variety of laboratory experiments.

"This is a recommendable introduction to experimental economics which demonstrates the experimental method of data collection and also presents some of its major findings.... I strongly recommend the book to any scholar interested in experimental economics."— Journal of Economics

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Experimental Economics: Method and Applications

• November 2018
• Publisher: Cambridge University Press
• ISBN: 9781107629776

• Ecole d'économie de Paris
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Experimental Economics

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• Language: English
• Publisher: Princeton University Press
• Copyright year: 1993
• Audience: Professional and scholarly;College/higher education;
• Main content: 584
• Keywords: absolute risk aversion ; adjustment to equilibrium ; Allais paradox ; animal experiments ; asset markets ; axiomatic game theory ; backward induction ; baseline ; binary lottery games ; Brandts ; J ; calibration ; categorical data ; choice reversals ; committee voting experiments ; cultural effects ; discounts ; disagreement in bargaining ; double-blind treatment ; Easley ; D ; econometric ; expected utility theory ; externalities ; financial incentives ; flow-market institution ; free-rider problem ; Gode ; D ; group effects ; Hammack ; J ; hindsight bias ; improvement rule ; incentive compatibility ; incomplete designs ; institutions ; Johansen ; L ; Kachelmeier ; S ; Krasner ; L ; laboratory currency ; Ledyard ; J ; Lieberman ; A ; Machina ; M ; market performance measures ; moral hazard ; motivation ; neoclassical price theory ; offer auction ; Pareto dominance ; permutation test ; quality uncertainty ; Ramey ; V ; rational expectations ; risk aversion ; separating equilibrium
• Published: July 13, 2021
• ISBN: 9780691233376

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Investor Influence on Media Coverage: Evidence from Venture Capital-Backed Startups

We examine the role of investors on the media coverage of their private firm investments. Specifically, we survey VC investors and find that 78% of the respondents take active steps to increase their portfolio companies’ media coverage. The survey results also demonstrate that increased media coverage supports the companies with better recognition and branding and provides benefits to diverse stakeholders. We extend the survey results using empirical tests. Both active VC monitoring and VC reputation are related to stronger effects. Overall, our findings emphasize the role of investors in media coverage decisions of private firms.

We examine the role of investors on the media coverage of their private firm investments. Specifically, we survey VC investors and find that 78% of the respondents take active steps to increase their portfolio companies’ media coverage. The survey results also demonstrate that increased media coverage supports the companies with better recognition...

Business Experiments as Persuasion

Much of the prior work on experimentation rests upon the assumption that entrepreneurs and managers use—or should optimally adopt—a "scientific approach" to test possible decisions before making them. This paper offers an alternative view of experimental strategy, introducing the possibility that at least some business experiments privilege persuasion over generating unbiased information. In this view, actors may craft experiments designed to gain support for their ideas, even if doing so reduces the informativeness of the experiment. However, decision-makers are not naïve—they are aware that the results they are reviewing may be the product of a curated information environment. Using a formal model, this paper shows that under a wide range of conditions, actors prefer to enact a less than fully informative experiment designed to persuade—even when a fully informative experiment is feasible at the same cost.

Much of the prior work on experimentation rests upon the assumption that entrepreneurs and managers use—or should optimally adopt—a "scientific approach" to test possible decisions before making them. This paper offers an alternative view of experimental strategy, introducing the possibility that at least some business experiments privilege...

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Title: network growth under opportunistic attachment.

Abstract: Growing network models can potentially be a useful tool in the development of economic theory. This work introduces an "opportunistic attachment" mechanism where incoming nodes, in deciding where to join a network, consider features of the entry points available to them. For example, an entrepreneur looking to start a thriving business might consider the expected revenue of many hypothetical businesses. This mechanism is explored, in isolation, via a minimal model where PageRank serves to score the available opportunities. Despite its simplicity, this model gives rise to rich node dynamics, path-dependence, and an unexpected degenerate structure. We go on to argue that this model might be useful to theoretical development as a maximally stylised model of entrepreneurial growth. Central to the argument is an alternative set of microfoundations introduced in Leontief & Brody (1993) whereby the steady state of a random walk is a notion of economic equilibrium. To the extent this argument holds, our findings suggest that entrepreneurs face a shifting "opportunity space" where the number of potential business opportunities is effectively unbounded. Opportunistic attachment is thus a candidate mechanism for relating the structure of an economic system to its future growth.

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