- is a method of creating empirical data in a controlled environment.
- Human subjects are given monetary incentives and make real decisions.
- The data are gathered in experimental sessions or in the field.
- The controlled environment allows a more thorough analysis of subjects’ behavior.
- Other methods of creating data—questionnaires, traditional field studies, or surveys—are additional information for analyzing behavior.
The value of experimental work was not recognized until the early 1960s, when Vernon Smith in the USA and Reinhard Selten in Germany ran their first experiments. Both used different approaches and both were very successful.
- Vernon Smith used his early experiments to test predictions of economic theory. He could show that the notion of market clearing at market price is an excellent predictor of the dynamics in experimental double auction markets. He also was awarded the Nobel Prize in Economic Sciences together with Daniel Kahneman.
- Reinhard Selten started by running experiments as a tool for exploration. His ideas about equilibrium selection in games, which won him the Nobel Prize in 1994, actually came to his mind while he was contemplating on the results of an experimental study.
In spite of these early successes, it took another two decades until the impact of experimental work on the economic science was evident. Finally, with the development of computerized labs in the 1980s, the research in this field gathered steam. By now, there are hardly any renown universities left without a computerized experimental economics lab.
Experimental economics by now is an acknowledged research discipline. A striking confirmation is the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel awarded to
- Vernon L. Smith “for having established laboratory experiments as a tool in empirical economic analysis” and to Daniel Kahneman “for having integrated insights from psychological research into economic science” (2002).
- Elinor Ostrom “for her analysis of economic governance, especially the commons” (2009). Experiments are a basic element of Elinor Ostrom’s research.