6 - Experimental Economics: Induced Value Theory

Summary

It is the premise of this paper that the study of the decision behavior of suitably motivated individuals and groups in laboratory or other socially isolated settings such as hospitals (R. Battalio, J. Kagel, et al., 1973) has important and significant application to the development and verification of theories of the economic system at large. There are two reasons for this.

The results of laboratory studies can serve as a rigorous empirical pretest of economic theory prior to the use of field data tests. The state of economic hypothesis testing, as it is sometimes done, can be described roughly as follows: based on casual observation of an economic process and the self-interest postulate, one develops a model, which is then tested with the only body of field data that exists. The results of the test turn out to be ambiguous or call for improvements, and one is tempted to now modify the model in ways suggested by the data “to improve the fit.” Any test of significance now becomes hopelessly confused if one attempts to apply it to the same data. Where it is possible and feasible, as in the study of price formation, the data from controlled experiments can be used to test hypotheses stemming from prescientific casual observations of a particular phenomenon.