Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms.
Economic experiments usually use cash to motivate subjects, in order to mimic real-world incentives.
It is important to consider the potential and constraints of games for understanding rational behavior and solving human conflict.
Under some conditions at least groups of experimental subjects can coordinate even complex non-obvious asymmetric Pareto-best equilibria.
Oftentimes, the general patterns of learning behavior can be best illustrated with individual choice tasks.
In the mid-1990s, Alvin E. Roth and Ido Erev demonstrated that reinforcement learning can make useful predictions in experimental games.
[10] In 1999, Colin Camerer and Teck-Hua Ho introduced Experience Weighted Attraction (EWA), a general model that incorporated reinforcement and belief learning, and shows that fictitious play is mathematically equivalent to generalized reinforcement, provided weights are placed on past history.
"[11] Vernon Smith, drawing on Chamberlin's work, but also modifying it in key respects, conducted pioneering economics experiments on the convergence of prices and quantities to their theoretical competitive equilibrium values in experimental markets.
[11] Smith studied the behavior of "buyers" and "sellers", who are told how much they "value" a fictitious commodity and then are asked to competitively "bid" or "ask" on these commodities following the rules of various real world market institutions (e.g., the Double auction as well the English and Dutch auctions).
Experimental finance studies financial markets with the goals of establishing different market settings and environments to observe experimentally and analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanism and returns processes.
As one example of results, ultimatum game experiments have shown that people are generally willing to sacrifice monetary rewards when offered low allocations, thus behaving inconsistently with simple models of self-interest.
Contract theory is concerned with providing incentives in situations in which some variables cannot be observed by all parties.
For instance, researchers have experimentally studied moral hazard theory,[12] adverse selection theory,[13] exclusive contracting,[14] deferred compensation,[15] the hold-up problem,[16][17] flexible versus rigid contracts,[18] and models with endogenous information structures.
[21] The "agent" refers to "computational objects modeled as interacting according to rules," not real people.
[26] [citation needed] The most famous software for conducting experimental economics research is z-Tree, which is developed by Urs Fischbacher from 1998 on.