Chris Starmer

Experimental Economics: Rethinking the Rules

Since the 1980s, there has been explosive growth in the use of experimental methods in economics, leading to exciting developments in economic theory and policy. Despite this, the status of experimental economics remains controversial. In Experimental Economics, the authors draw on their experience and expertise in experimental economics, economic theory, the methodology of economics, philosophy of science, and the econometrics of experimental data to offer a balanced and integrated look at the nature and reliability of claims based on experimental research. The authors explore the history of experiments in economics, provide examples of different types of experiments, and show that the growing use of experimental methods is transforming economics into a genuinely empirical science. They explain that progress is being held back by an uncritical acceptance of folk wisdom regarding how experiments should be conducted, a failure to acknowledge that different objectives call for different approaches to experimental design, and a misplaced assumption that principles of good practice in theoretical modeling can be transferred directly to experimental design. Experimental Economics debates how such limitations might be overcome, and will interest practicing experimental economists, nonexperimental economists wanting to interpret experimental research, and philosophers of science concerned with the status of knowledge claims in economics.

Testing for juxtaposition and event-splitting effects

Regret theory predicts that choices over prospects will be systematically influenced by the juxtaposition of outcomes in the payoff matrix. Experiments have found apparent juxtaposition effects of this kind. However, these experiments have not controlled for “event-splitting effects” (ESEs), by which the subjective weight given to an outcome depends on the number of states of the world in which it occurs, as well as on their combined probability. An experiment is reported that tests independently for juxtaposition effects and ESEs. The results suggest that the apparent juxtaposition effects found in previous experiments are largely due to ESEs.

Focal points in pure coordination games:An experimental investigation

This paper reports an experimental investigation of the hypothesis that in coordination games, players draw on shared concepts of salience to identify ‘focal points’ on which they can coordinate. The experiment involves games in which equilibria can be distinguished from one another only in terms of the way strategies are labelled. The games are designed to test a number of specific hypotheses about the determinants of salience. These hypotheses are generally confirmed by the results of the experiment.

Explaining Focal Points: Cognitive Hierarchy Theory Versus Team Reasoning

This article reports experimental tests of two alternative explanations of how players use focal points to select equilibria in one-shot coordination games. Cognitive hierarchy theory explains coordination as the result of common beliefs about players’ pre-reflective inclinations towards the relevant strategies; the theory of team reasoning explains it as the result of the players’ using a non-standard form of reasoning. We report two experiments. One finds strong support for team reasoning; the other supports cognitive hierarchy theory. In the light of additional questionnaire evidence, we conclude that players’ reasoning is sensitive to the decision context.

Preference Reversal: Information-Processing Effect or Rational Non-transitive Choice?

Preference reversal is often explained as an information-processing effect, whereby individuals respond differently to valuation problems than to straight choices. Regret theory offers the alternative explanation that individuals act on consistent, but nontransitive, preferences. Regret theory, in its most general form, is shown to make specific predictions about nontransitive pairwise choices that correspond with the preferences reversal phenomenon. Some experiments designed to discriminate between these two explanations are reported. The main finding is that, as regret theory predicts, the preference reversal phenomenon can be reproduced in situations in which subjects confront only choice problems. Copyright 1989 by Royal Economic Society.

Experiments in economics: should we trust the dismal scientists in white coats?

Is the rapid growth of experimental research in economics evidence of a new scientific spirit at work or merely fresh evidence of a misplaced desire to ape the methods of natural sciences? It is often argued that economic experiments are artificial in some sense that tends to render the results problematic or uninteresting. In the early part of this paper I argue that this artificiality critique does not provide a convincing philosophical objection to experimentation in economics. Later sections of the paper argue that methodological discourse in relation to experiments has become somewhat polarized: experimentalists have promoted a position that seeks to defuse objections to experiments; theorists have taken up positions that insulate theory from experimental challenge. I argue that these strategies are overly defensive and tend to stifle rather than promote the goals of economic enquiry.

Testing New Theories of Choice under Uncertainty using the Common Consequence Effect

A generalised common consequence problem is used to contrast the predictions of expected utility theory and several new theories of choice under uncertainty. An experiment designed to test these predictions is reported. Systematic violations of expected utility theory are detected but although a consistent pattern emerges from the data, it offers little support for any of the new theories. The analysis is extended to test predictions which are unique to regret theory and significant regret effects are detected.

Discovered preferences and the experimental evidence of violations of expected utility theory

The discovered preference hypothesis appears to insulate expected utility theory (EU) from disconfirming experimental evidence. It asserts that individuals have coherent underlying preferences, which experiments may not reveal unless subjects have adequate opportunities and incentives to discover which actions best satisfy their preferences. We identify the confounding effects to be expected in experiments, were that hypothesis true, and consider how they might be controlled for. We argue for a design in which each subject faces just one distinct choice task for real. We review the results of some tests of EU which have used this design. These tests reveal the same violations of the independence axiom as other studies have found. We conclude that the discovered preference hypothesis does not justify scepticism about the reality of these effects.

Testing Explanations of Preference Reversal

We present a new experimental investigation of preference reversal. Although economists and psychologists have suggested a variety of accounts for this phenomenon, the existing data do not adequately discriminate between them. Relative to previous studies, our design offers enhanced control for economic explanations and new tests of psychological hypotheses. We find a pattern of preference reversals that is inconsistent with all of the best-known explanations of the phenomenon proposed by economists, with the fundamental economic assumption of context-free preferences, and with several psychological theories of preference reversal. We explore the explanatory strategies that survive exposure to our data.

CYCLING WITH RULES OF THUMB: AN EXPERIMENTAL TEST FOR A NEW FORM OF NON-TRANSITIVE BEHAVIOUR

This paper tests a novel implication of the original version of prospect theory (Kahneman and Tversky, 1979): that choices may systematically violate transitivity. Some have interpreted this implication as a weakness, viewing it as an anomaly generated by the ‘editing phase’ of prospect theory which can be rendered redundant by an appropriate re-specification of the preference function. Although there is some existing evidence that transitivity fails descriptively, the particular form of non-transitivity implied by prospect theory is quite distinctive and hence presents an ideal opportunity to expose that theory to test. An experiment is reported which reveals strong evidence of the predicted intransitivity. It is argued that the existence of this new form of non-transitive behaviour presents a fresh theoretical challenge to those seeking descriptively adequate theories of choice behaviour, and a particular challenge to those who seek explanations within the conventional economic paradigm of utility maximisation.