In Professor Pathak’s 14.04 class today, we touched upon the fallacies of experimental economics. When economists take surveys on a randomly selected audience, they often ignore the caveat that people behave differently when scruitinized/ when they know that they are experimented on. Even when they know that their submissions are anonymous, they usually feel more obligated towards making a decision that seems ‘right’.

Professor Pathak called up two students. One was deemed a dictator and given $10. The other was deemed the commandee. The dictator was allowed to give the commandee a portion of the money and could keep the rest. The chosen student decided to keep all $10, hence, demonstrating the ‘rational’ mindset of undergrad economic students and defying the usual behavior of the tested subjects.

Studies show that the average amount of money that the dictator normally gives is $2, partly because of unconscious social pressures and the desire to do things the ‘right’ way. There are three main peaks and they are at $5, $2, and $0. Those ones who do not give away any money are the rationalists (hence, in most of these experiments, undergraduate economics students were excluded). The ones who gave the other $5 did what they thought ‘fair’ and the ones who gave $2 did so out of obligation and social niceties.

In our class example however, the student represented the minority unaffected by caveats that calls the tactics of experimental economics into question. Think about it this way, if you knew you were in an experiment and you were asked to handle the $10- with the eyes of forty people upon you- what would you do?

Come to the lecture of guest speaker Ernst Fehr if you are interested in the reasoning behind these strategies. Professor Fehr will be giving a talk on “Social Preferences- A Foundation of Cooperation, Competition, and Incentives” on Tuesday, October 13, 2009 at 4 pm in Room E51-325!