1. Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263-292.
This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low probabilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling.
2. Smith, V. L. (1982). Microeconomic systems as an experimental science. The American Economic Review, 72(5), 923-955.
In this paper, author explores the application of experimental methods in microeconomics, highlighting the potential for experimental research to provide valuable insights into economic phenomena. Smith discusses the advantages of using controlled laboratory experiments to study economic behavior, emphasizing the importance of testing theoretical predictions and assumptions in a controlled setting. He argues that experimental economics can enhance our understanding of market processes, individual decision-making, and strategic interactions. Smith's paper contributes to the growing recognition of experimental approaches as a valuable tool for advancing microeconomic research and sheds light on the possibilities of using laboratory experiments to study complex economic systems.
3. Holt, C. A., & Sherman, R. (1999). Classroom games: A market for lemons. Journal of Economic Perspectives, 13(1), 205-214.
The incentives that arise in markets with asymmetric information are illustrated in the classroom exercise presented here. Student sellers choose both a quality ‘grade’ and a price for their products. Initially, both prices and grades for all sellers are posted, and buyers select from these offerings. In this full-information setup, the market prices and grades quickly reach efficient levels that maximize total surplus. Next, although sellers continue to choose grades and prices, only prices (not grades) are posted for buyers to see when they shop. The grades and prices then fall to inefficiently low levels. The observed market outcomes in this exercise can stimulate useful discussion of asymmetric information, market failure, and remedies such as quality standards and warranties.
4. Kurzban, R., McCabe, K., Smith, V. L., & Wilson, B. J. (2001). Incremental commitment and reciprocity in a real-time public goods game. Personality and Social Psychology Bulletin, 27(12), 1662-1673.
Allowing players in public goods games to make small incremental commitments to contributing to the good might facilitate cooperation because it helps to prevent players from being “free ridden,” contributing more to the public good than other group members. Two experiments using a real-time version of the voluntary contribution mechanism were conducted to investigate the hypothesis that players are generally willing to contribute public goods conditional on beliefs that others are doing so at similar levels. Experiment 1 provided evidence that affording a strategy of commitment can increase the production of public goods. Experiment 2 provided evidence that most players are willing to contribute to the public good at a level at or slightly above the contribution of the lowest contributor in the group. Both experiments point to inequity aversion as an important element of play in public goods games.
5. Nikiforakis, N. (2010). For the student: experimental economics. Australian Economic Review, 43(3), 337-345.
Experimental economics is a branch of economics that uses controlled experiments to explore the predictive power of theories, evaluate behavioural assumptions, investigate behavioural regularities and test the implementation of policies. It is one of the fastest growing areas of economics (Oswald 2010). The development of an experimental methodology in economics is recent relative to other disciplines such as physics and psychology. Although informal experiments were conducted as early as in the eighteenth century (see Bernoulli 1738), the results from the first formal economic experiment appeared in an article by Edward Chamberlin in 1948. After half a century of continuous growth in the number of economic experiments, in 2002, Vernon Smith, a participant in Chamberlin’s experiment, was awarded the Nobel Prize ‘for establishing laboratory experiments as a tool for empirical economics analysis’(Nobel Announcement 2002). This article is an introduction to experimental economics aimed primarily at students and scholars with little or no prior knowledge on the topic. The next section discusses why controlled experiments are a valuable tool in economics and proceeds to present lab and field experiments, provide examples of experiments, and address some of the common criticisms regarding laboratory experiments.
6. Jaworski, T., Smith, V. L., & Wilson, B. J. (2010). Discovering economics in the classroom with experimental economics and the Scottish enlightenment. International Review of Economics Education, 9(2), 10-33.
This paper describes a curriculum for teaching economics using laboratory experiments. The key features of the curriculum are the low technology barriers, complete instructions for running the experiment and debriefing the results, and a guide for teacher-led roundtable discussions motivated by the Scottish philosophers. Our main goal is to present economic principles to young students in a way that is both exciting and accessible, while emphasizing the discovery process underlying wealth creation in modern economies using laboratory experiments.
7. List, J. A., Sadoff, S., & Wagner, M. (2011). So you want to run an experiment, now what? Some simple rules of thumb for optimal experimental design. Experimental Economics, 14, 439-457.
Experimental economics represents a strong growth industry. In the past several decades the method has expanded beyond intellectual curiosity, now meriting consideration alongside the other more traditional empirical approaches used in economics. Accompanying this growth is an influx of new experimenters who are in need of straightforward direction to make their designs more powerful. This study provides several simple rules of thumb that researchers can apply to improve the efficiency of their experimental designs. We buttress these points by including empirical examples from the literature.
This material is an output of the project KEGA 017EU-4/2021 entitled “Implementation of experimental economics as innovative method for development of new skills for economic education”.