| Experimental Economics: Rethinking the Rules |
| Nicholas Bardsley, Robin Cubitt, Graham Loomes, Peter Moffat, Chris Starmer and Robert Sugden, Princeton University Press, 2009, pp i–viii and 375 pages, £37.95. |
| The six authors of this book all have distinguished pedigrees in experimental economics. Two in particular, Loomes and Sugden, have been involved with this research programme almost from its very outset some two decades ago. |
| The experience and knowledge of the authors shines through the book. They have complete intellectual command of the issues, which shows in their ability to communicate what are sometimes rather complex ideas in a clear and readable manner. Their authority shows, too, in the comprehensive list of almost 500 scholarly references which ranges across the entire field of experimental economics. |
| Experimental economics raises profound difficulties for the conventional economic model of preference theory based upon rational choice. The extension of the latter by the concept of bounded rationality does not evade the problems. |
| Many of the key results were discovered in fairly simple experiments in the early years of the whole enterprise of experimental economics. For example, consumer preferences appear in general to be non-transitive. Agents’ decisions are influenced by irrelevant alternatives. Preference reversal is widespread, in other words the revealed preference ordering of a pair of alternatives depends on the process used to elicit the preference. These are just some of the examples. |
| Not surprisingly, mainstream economists, in so far as they bother to engage with this research, have put forward many methodological criticisms of the findings. Experimental economics has become more sophisticated in its methodology over the years, and this is an important theme of the book. Criticisms and potential weaknesses of the methodologies adopted are discussed in an admirably balanced and thorough way. |
| Game theory has dominated many aspects of modern economics, and its advocates often argue that it cannot be tested experimentally unless the experimenter gets the pay-offs right. The authors turn this neatly on its head. Substantive assumptions about the pay-off matrix must be made before game theory can even begin to offer an account of any real world situation. The informational demands placed on agents by this are, of course, such as to render game theory useless in most practical situations. |
| There are two areas in particular which could have merited more extensive discussion. The first relates to the wider historical and intellectual background to experimental economics. Hayek, for example, developed profound arguments over half a century ago on the inherent limits to knowledge in social and economic systems, which are now being explored in the context of complexity science. Much of the discipline of psychology had, for example, offered for many years empirically based models of behaviour which stand in stark contrast to the models of mainstream economic theory. Some reference to this is made in the book, but experimental economics emerged from a foundation which was already both wide and deep. |
The second is the extent to which the economics profession has absorbed the findings. Only in the final four pages is this question explored. Experimental economics undoubtedly offers a programme of future research of agent-based models in which the agents follow empirically-based rules. But despite the fact that Kahneman and Tversky won the Nobel Prize for their work in economics and psychology, much of the profession continues to ignore both the results and their implications.
Still, overall, this is an excellent, well-written book which all economists will benefit from reading. |
Paul Ormerod
Volterra Consulting |