Econ 440: Experimental Economics Lecture 1 PDF

Econ 440: Experimental Economics Lecture 1 Prof Ragan Petrie Texas A&M University August 20, 2024 Howdy! What This Course is About ▶ Introduction to behavioral and experimental economics ▶ Behavioral economics ▶ Study of human behavior that falls o...

Econ 440: Experimental Economics Lecture 1 Prof Ragan Petrie Texas A&M University August 20, 2024 Howdy! What This Course is About ▶ Introduction to behavioral and experimental economics ▶ Behavioral economics ▶ Study of human behavior that falls outside of the “standard model” of economic theory (more on this later) ▶ Heavy influence from psychology ▶ Experimental economics ▶ Application of experimental methods to economic questions ▶ Experiment: a designed procedure for collecting data with the goal of testing a scientific hypothesis Slido.com Poll (#ec440survey): ▶ A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost? ▶ If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? ▶ In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake? Survey Results Cognitive Reflective Test ▶ A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost? 5 cents (not 10) ▶ If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? 5 minutes (not 100) ▶ In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake? 47 days (not 24) System 1 vs System 2 ▶ System 1: Fast, intuitive ▶ System 2: Slow, analytical ▶ Can we force you to use System 2 over System 1 by making the font hard to read? ▶ Some evidence that this improves scores (Alter et al, 2007), n=40 ▶ Replications do not find strong effects (Thompson et al, 2013), n=150 The Trolley Problem ▶ There is a runaway trolley barreling down the railway tracks. Ahead, on the tracks, there are five people tied up and unable to move. The trolley is headed straight for them. ▶ You are standing some distance off in the train yard, next to a lever. If you pull this lever, the trolley will switch to a different set of tracks. However, you notice that there is one person on the side track. You are on a bridge under which it will pass, and you can stop it by putting something very heavy in front of it. As it happens, there is a very fat man next to you and your only way to stop the trolley is to push him over the bridge and onto the track. ▶ You have two options: 1. Do nothing, and the trolley kills the five people on the track. (30%) (60%) 2. Pull the lever, diverting the trolley onto the side track where it will kill one person. Push the fat man over the bridge and onto the track, and the trolley kills him. (70%) (40%) ▶ slido.com poll (#ec440trolley) Why Are These Situations So Different? ▶ Outcome is the same in both (5 deaths vs 1 death) ▶ What is different? ▶ Framing ▶ Agency ▶ Conceptions of fairness ▶ Moral dilemmas related to self-driving vehicles, Moral Machine, MIT, http://moralmachine.mit.edu/ iPad Purchase ▶ Imagine that you are about to purchase an iPad for $500 and an iPad case for $25. ▶ The salesman tells you that the case comes with the iPadthe iPad is on sale for $475 at another branch of the store, located 20 minutes away. ▶ The iPadcase is the same price at this other store. ▶ Would you make the trip to the other store? 1. Yes (75%) (67%) 2. No (25%) (33%) What is Going on Here? ▶ Discount on the entire bundle is the same in both versions ▶ This is an example of a heuristic that leads to a bias ▶ Heuristic ▶ Definition: A decision rule that is easy to apply but does not follow from standard economic theory ▶ Often leads to an adequate answer in most settings but maybe wrong answers in other settings ▶ Example: discounts on more expensive items are better ▶ Bias ▶ Definition: A systematic error ▶ Errors are common in standard economics, but they usually average out ▶ Example: People are more attracted to the discount on the bigger-ticket item even when benefit to them is the same Course Overview The Standard Model ▶ What assumptions does the standard economic model make? ▶ Correct beliefs ▶ About the world ▶ About your own abilities ▶ About others’ level of sophistication ▶ Risk averse, but no reference points ▶ Purely selfish ▶ Demonstrate patience and self-control in decisions over time ▶ Infinite computational power ▶ Frame-insensitive The Behavioral Approach ▶ What are more realistic assumptions? ▶ Persistently incorrect beliefs about the world: Non-Bayesian updating ▶ Incorrect beliefs about the rationality of others: Behavioral game theory ▶ Non-classical risk preferences: prospect theory, loss aversion, ambiguity aversion ▶ Social preferences ▶ Non-classical time preferences: hyperbolic discounting, self-control issues ▶ Limited computational power: bounded rationality, heuristics ▶ Frame-sensitivity Types of economic data 1. Naturally occurring data ▶ Data that is observational, i.e. not designed by researcher ▶ Includes so-called “natural” experiments 2. Controlled data ▶ Natural field experiment: subjects don’t know they are in experiment ▶ Framed field experiment: subjects know they are in experiment, but are in a familiar setting ▶ Artefactual field experiment: subjects in the lab, but doing familiar activities (e.g. doctors in the lab choosing treatment options) ▶ Lab experiment See Reiley and List (2008), Field Experiments in Economics or Harrison and List (2004), “Field Experiments,” Journal of Economic Literature for more details Housekeeping Class structure ▶ Class is divided into four modules ▶ 2-3 weeks of lecture ▶ 1 week of Review Day/TA Office hours (Tuesday, Zoom) and Exam (Thursday, in class) on material in module ▶ Modules build on one another ▶ Four exams and four ungraded problems sets ▶ Daily in-class quizzes (16) ▶ Group research project proposal How Class Time will be Spent ▶ Lecture ▶ Take notes ▶ Ask questions and be asked questions ▶ Follow-up from previous lecture and readings ▶ In-class activities ▶ Experiments on MobLab (also out of class) ▶ Goal - combo will help you better digest the material What You Should be Reading ▶ Thinking Fast and Slow, Daniel Kahneman, 2011 ▶ Markets, Games, and Strategic Behavior, Charles Holt, 2019 ▶ Assigned research articles (classics) and book chapters ▶ listed on class schedule (syllabus) ▶ Your lecture notes Moblab ▶ Sign up for an account ($25) before second class (Aug 22) ▶ In-class activities/experiments done on Moblab ▶ Attendence ▶ Details posted on Canvas (Module 1) How Your Grade is Determined Assignment Weight (pct) In-class quizzes 20 Participation in classroom discussions and experiments 10 Exams 45 Research Proposal GMP, IB, Video, Feedback 5 Research Proposal Paper & Oral Defense 20 In-class quizzes ▶ Reading schedule on syllabus ▶ Do readings before class ▶ Review your notes ▶ 16 short in-class quizzes to check comprehension of material (readings, lectures) ▶ Every class except Review Days, Exams ▶ Drop 3 lowest quiz grades - do not need to provide an excuse Participation ▶ Ask and answer questions during class ▶ Participant in activities and experiments ▶ Will occur during many classes ▶ Moblab ▶ Drop 3 Moblab participation credits - do not need to provide an excuse Ungraded Problem Sets ▶ Post problems on Canvas ▶ Not graded ▶ Highly encouraged to work in groups ▶ Go over problem sets in office hours and Review Days Exams and Review Days ▶ There will be four in-class exams (75 minutes) ▶ Each exam preceded by TA/Office hours or Review Day (Zoom) ▶ Each exam test comprehension of material covered in module ▶ Material builds on previous module material ▶ Worst exam score worth 4.5 percent of final grade, each of other three exams worth 13.5 percent Research Proposal ▶ Proposal done in groups (5-6 students) ▶ Come up with a novel research question and propose an experimental design that would generate data to answer the question ▶ Guidelines posted on Canvas (Module 1), schedule posted on Syllabus ▶ Group formation: submit preferences, I assign groups ▶ Group management plan (form on Canvas) ▶ Idea Brief (form on Canvas) ▶ Presentation video ▶ Final paper ▶ Oral defense of paper ▶ You assess each group member’s contribution ▶ Individual grades adjusted from Oral Defense and assessment Disability Resources ▶ Register with Disability Resources this week. They send me an accommodation letter ▶ Make an appointment with me the second week of class to discuss your accommodation Quiz 0: Diagnostic