Experimental Economics

Experimental economics relies on controlled experiments conducted in laboratory settings to analyze how individuals make decisions within economic structures, the underlying reasoning, learning and cognitive processes behind these decisions. These experiments are used for applied purposes such as testing economic theories, supporting the development of politics and designing institution or market like. In controlled experiment environments, participants are presented with questions requiring them to make decisions within specific economic scenarios. These experimental games have an interactive structure that reflects the participants’ economic conditions. Research seeks to answer questions such as which environmental factors influence individuals’ decision-making processes, whether individuals are affected by others’ decisions, and how these decisions are shaped.

The primary aim of experimental economics is to systematically and controllably examine individuals’ economic decision-making processes in laboratory settings to test the validity of economic theories. This field aims to observe whether the rational choice model assumed by traditional economics aligns with people’s actual behavior in real life. It also seeks to answer questions about how individuals think during decision-making, which cognitive processes they undergo, and how they are influenced by environmental factors. Thanks to experimental methods, it becomes possible not only to test theories but also to develop more effective economic policy recommendations and design efficient markets or institutions. Thus, experimental economics fulfills a dual role in both theoretical and applied economics, important as a bridge.

Vernon L. Smith is recognized as the pioneer of experimental economics. His laboratory experiments in the 1960s systematically investigated how markets function and how individuals behave within them, laying the foundations of the field. In particular, through his experiments with the “double auction” mechanism on, he demonstrated that competitive market equilibrium can emerge even in laboratory settings. For these contributions, he was awarded the Nobel Prize in Economics in 2002. Daniel Kahneman, who shared the Nobel Prize that year, made significant contributions to the field through his behavioral economics research grounded in psychology. However, the person who established the institutional and methodological framework for experimental economics is Vernon Smith.

Methods of Experimental Economics

Laboratory Experiments.

Participants make decisions within a controlled environment under rules and incentives predetermined by the researcher.

• Advantage: Complete control over variables is achieved.
• Purpose: To test the validity of theories and analyze individual behavior in isolation.
• Examples: Auction games, public goods contribution games, the prisoner’s dilemma.

Field Experiments

Experiments are conducted in real-world life conditions, within participants’ natural environments.

• Participants are often unaware they are part of an experiment.
• Advantage: High external validity (i.e., greater applicability to real life).
• Examples: The impact of tax incentives on individual behavior, donation decisions, discrimination in job applications.

Natural Experiments

An exogenous event occurring outside the researcher’s control creates a natural experimental setting.

• Analysis is typically conducted after a policy change or an unexpected external shock.
• Example: Examining the effect of an increase in the minimum wage in a region on employment.

Agent-Based Experiments

Computer simulations or artificial agents are used instead of real individuals.

• Preferred for observing interactions among individuals in complex systems.
• Generally serve a supportive role to other types of experiments.

Survey and Choice Experiments

Participants are presented with different scenarios and asked which option they would prefer.

• Commonly used in preference analysis, public policy evaluation, or consumer behavior research.