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George Mason’s Experimental Economics Center Is Leader in Field
By Jeremy Lasich
When a team of seven distinguished economics professors from the University
of Arizona joined George Mason’s faculty last year, many were reminded of
James Buchanan who won the 1986 Nobel Prize in Economics. That’s because
the team’s lead economist and the “father of experimental economics,”
Vernon Smith, has been cited by the Washington Post as a potential Nobel
winner himself.
Smith, along with Daniel Houser, Kevin McCabe, Mark Olson, David Porter, Stephen
Rassenti, and Bart Wilson, brought the Interdisciplinary Center for Economic Science
(ICES) to George Mason. Housed on the Arlington Campus, ICES consists of three
broad sections of research and teaching: experimental economics, neuroeconomics,
and economic systems design (ESD).
The main focus of the group’s work in experimental economics is to use
the lab to study markets, such as the New York Stock Exchange. In addition to
the basic research in price formation in financial markets, experimental economics
assists in public policy debates concerning price controls, subsidies, and other
regulatory controls to better educate decision makers.
“Experimental economics has leaped to the frontier of modern economic
science and is commonly considered the most important recent development in the
profession,” says Tyler Cowen, executive director of the Mercatus Center
and associate professor of economics. “This group has the greatest concentration
of expertise in the field.”
Some of the economists’ experiments take the form of games. One game,
for example, is designed to test the extent to which trust may impact economic
decisions. In the game, 12 human subjects are placed in a room together and divided
into pairs, with no one ever knowing with whom he or she is paired. Each player
must choose between the following choices:
- You are Person A. You will be given $40, which you must
split evenly with another subject in the experiment—Person B—in which
case the game is over, or
- You, Person A, present Person B with two choices, involving different
sums: You tell Person B he can take $30 out of $45, leaving you $15,
or he can split $50 evenly between the two of you.
You, as person A, have a sure $20 if you choose the first alternative; if
you go for the second, you will be left with either $15 or $25, depending on Person
B’s decision.
“In that environment, a good half of our subjects use trust and the
expectation of trustworthiness that enables them to do better and make more money,”
says Smith. “It’s very risky though because if I give up a lower payment
to go after a higher one and you don’t respond, I finish with less money
than what I was guaranteed. We call this reciprocity—I do something for
you, you do something for me. Reciprocity is so strong in people that it even
survives in anonymous interaction between strangers.”
“The Interdisciplinary Center for Economic Science is not just a name,
it represents something,” says Porter. “The last part of the name
refers to the use of experiments in economics. That’s our method—being
scientific…. Our research is interdisciplinary as it crosses over into engineering,
psychology, computer science, and philosophy.”
The economists are always looking to recruit test subjects for their experiments.
All subjects receive a sign-up fee that varies with the opportunity costs. In
a typical experiment a person would be set up in front of a terminal with instructions
on how to make decisions and what the payouts will be in different scenarios.
Any money earned during the game is the subject’s to keep. Students and
staff members are eligible to apply, and sometimes faculty members are used.
McCabe leads the center’s research in neuroeconomics. Combining neuroscience
and economics, neuroeconomics explores how the brain works as people solve problems
such as making choices between alternative actions, forming expectations about
the future, carrying out plans, and engaging in personal and impersonal exchange
with others.
“People seem to have a very natural propensity to trade with each other
and exchange information or ideas, even goods and services at a very basic level,”
says McCabe. “Exchange probably has an evolutional advantage. Our argument
is that if we’re adapted for exchange, then the logical expression for that
has to be in the brain. We’ve taken experiments we’ve done in the
laboratory to study behavior to see what decisions people have made and we now
can ask: How is the brain processing the information that’s necessary to
get to those decisions? What is the brain paying attention to, what is being ignored,
and what information matters?”
ESD is a unique program offered by ICES. The main focus is the design, development,
testing, and implementation of exchange systems, such as auctions to allocate
public resources. ESD utilizes experimental methods in economics as a way to test
new exchange systems.
“This is a central part of our teaching, especially in our new course
offerings this fall; these courses are multidisciplinary, and can be taken by
students in economics, engineering, computer science, mathematics, and so on,”
says Smith.
For more information on ICES, visit www.ices-gmu.org.
To sign up for an experiment, visit ices1.gmu.edu.
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