2  The experimental approach in economics and psychology

Economists and psychologists use controlled experiments to test what choices people make in specific circumstances.

Most economics experiments are not pure simulations or role-playing exercises. They involve real people who make real choices to make or lose money.

Researchers design an experiment that captures the features of some “real world” settings, such as markets. Some participants are assigned the roles of buyers and sellers making trades. Participants have an incentive to think carefully about their decisions since the money they earn from trading is theirs to keep.

During the experiment, researchers can change features of the environment, such as the rules of exchange and the incentives. By observing how the participants’ behaviour changes as the rules or incentives change, they can examine the effects of the intervention. They can then compare the actual results of the experiment with theoretical predictions about how people would respond to the change. 

In 2002, Vernon Smith won the Nobel Prize in Economics for “having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms.”