Robin P. Cubitt

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.

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.

On Money Pumps

Abstract The question of whether money pump arguments justify standard consistency assumptions about behavior has remained unresolved, partly because of the absence of an appropriate analytical framework. We present a new framework which fills this gap, provide a formal definition of invulnerability to money pumps, and formulate a requirement of maximal opportunism. We show that behavior which satisfies none of the standard consistency assumptions can be both invulnerable and maximally opportunist. We present two conditions which, combined with maximal opportunism, imply the existence of a choice function rationalized by an ordering and satisfying the sure thing principle. Journal of Economic Literature Classification Numbers: B41, C73, D81.

Dynamic Decision-Making under Uncertainty:An Experimental Investigation of Choices between Accumulator Gambles

This paper presents an experiment that is designed to be more effective than previous studies at reproducing in the laboratory the affective experiences of risk-taking, such as hope, fear, thrill, pain of loss, regret, disappointment or elation. The use of dynamic choice problems involving accumulator gambles, and a particular randomisation device to resolve them, are central to the design. Our results both are inconsistent with orthodox dynamic choice theory and cast doubt on the generality of effects observed in previous designs. We discuss these findings, in terms of the relative impacts on behaviour of affective experience and judgement.

The Selection of Preferences Through Imitation

The paper presents a model in which a population of agents repeatedly play games against nature; the rules of behaviour followed are revised over time through a process of imitation. For binary decisions, imitation selects rules consistent with a preference relation of the kind proposed by SSB utility theory and regret theory. In general, this preference relation need not satisfy either independence or transitivity; we state conditions on imitation necessary for it to do so. For decisions over three or more options, the long-run tendency is for options that are maximally preferred in terms of SSB preferences to be chosen. If no maximally preferred option exists, the process of imitation may not converge.

Experiments and the domain of economic theory

This paper distinguishes the base domain of an economic theory (in which predictions are relatively unambiguous) from, respectively, the domains of intended application and of legitimate testing; it argues that the domain of legitimate testing is not generally restricted to that of intended application; and discusses the obligations on researchers imposed by a position that presumes experimental environments in the base domain of a theory to provide legitimate test, unless there is compelling reason to expect behaviour in the domain of intended application to conform more closely to the theory. Experimental tests of choice theory are discussed as an example.

Common Reasoning In Games: A Lewisian Analysis Of Common Knowledge Of Rationality

The game-theoretic assumption of ‘common knowledge of rationality’ leads to paradoxes when rationality is represented in a Bayesian framework as cautious expected utility maximisation with independent beliefs (ICEU). We diagnose and resolve these paradoxes by presenting a new class of formal models of players’ reasoning, inspired by David Lewis’s account of common knowledge, in which the analogue of common knowledge is derivability in common reason. We show that such models can consistently incorporate any of a wide range of standards of decision-theoretic practical rationality. We investigate the implications arising when the standard of decision-theoretic rationality so assumed is ICEU.

Minimum Wage Legislation, Investment and Human Capital

A two period, general equilibrium, model is analyzed in which agents foresee how the second period outcome is determined by the investment decisions which they make in the first period. These decisions concern the acquisition of human and physical capital. The paper considers the impact of a minimum wage in the second period. It shows that, in equilibrium, this policy increases both types of investment. There is a range of values of the minimum wage at which the increases in investment are obtained without any reduction in period 2 employment. This is welfare-improving for a range of parameter values. Under very specific circumstances, the minimum wage achieves a Pareto efficient outcome. Copyright 1999 by Scottish Economic Society.

Stagflationary bias and the interaction of monetary policy and wages in a unionized economy

Economics Research Centre, School of Economic and Social Studies, University of East Anglia, Norwich NR4 7TJ, U.K. The paper investigates the claim of Gylfason and Lindbeck (Public Choice, 1994) that a stagflationary bias arises from the interaction between monetary policymaking and wagesetting if, among other things, the government and unions share a concern for inflation. It uses a game theoretic model of this interaction, in which the government plays an economy-wide union. Though simple, this nests several other models as special cases. In that corresponding to Gylfason and Lindbecks model, the factors which they identify are shown to be sufficient for stagflationary bias, in a specified sense. However, for the union to care about inflation is not a necessary condition. The main result of the paper concerns the more general model. It establishes a set of necessary and sufficient conditions for stagflationary bias, as previously defined. These conditions do not include a shared concern for inflation. The paper comments briefly on the significance of this result for stagflation and economic modelling.