Introduction to Experiments with Economic Principles

In this course we will teach economics principles by alternating experimental classroom markets with discussions of the related economic theory and its applications.   The subject of economics is ideally suited to an experimental approach.  By participating in economic experiments,  you will be able to observe economic principles in action.  After you have participated in an experiment and recorded the results, we will present economic theories designed to explain what happened in the laboratory.  With the data collected from the classroom experiments, you can discover how well or how badly each theory works in predicting the experimental outcome. With this motivation, theories come to life and once they seem real, they become interesting.  We expect that  in the process, you will  come  to appreciate  the great  power and some of  the shortcomings of  economic theory in explaining the economic world in which we live.

Our textbook is called Experiments with Economic Principles.  It was written by Professor Theodore Bergstrom of the University of California at Santa Barbara and Professor John Miller of Carnegie Mellon University.  (If you are curious to read more about this textbook and its uses, to see a web site devoted to this text.)  It  is the first introductory economics textbook to be focused on principles of economics by means of experiments.  We believe that this method of teaching is superior to the standard lecture methods.  We hope that you will agree.


Since almost nobody reads the prefaces of textbooks (because they are almost never worth reading), we will call your attention here to the preface of Experiments with Economic Principles (which we do believe is worth reading).

PREFACE

Taking this course in economics-by-experiment is a bit like being dinner guest at a cannibal's house. You may be a diner, you may be the dinner, or you may be both.

If you take a laboratory course in the physical sciences, you get to mix smelly chemicals, or monkey with pulleys, or dissect a frog, but you are always the experimenter and never the subject of the experiment. In the market experiments conducted in this class, you and your classmates will be the participants in the markets as well as the scientific observers who try to understand the results.

It is hard to imagine that a chemist can put herself in the place of a hydrogen molecule. A biologist who studies animal behavior is not likely to know what it feels like to be a duck. You are more fortunate. You are studying the behavior and interactions of people in economically interesting situations. And as one of these interacting economic agents, you will be able to experience the problems faced by such an agent first hand. We suspect that you will learn nearly as much about economic principles from your experience as a participant as you will from your analysis as an observer.



Course Requirements and Grading


Participation

The experiments will be held during selected class meetings, as detailed in the class schedule. For many courses, class attendance is incidental to the reading assignments and homework. In such courses, students may quite rationally choose to skip class when they are busy. But for this class, in order to participate in the experiments and to discuss the results, you must attend lectures, and you must show up on time. Students who come late to an experiment will not be allowed to participate and will be marked as absent (your attendance at the experiments is one component of your grade, as explained below).

Homework

You will be required to complete and hand in homework analyzing the results of the in-class experiments. The completed homeworks are to be handed in at the beginning of the class meeting in which the homework is due (see the class schedule for a list of the due dates for the various homeworks).  Homeworks must be turned in on time in order for you to receive credit.  The data for your homework will come from the experiment you participated in and will be made available to you on the class web page, generally by 5PM the day of the experiment. While not required, the lab reports and homework in the book will be very helpful in doing the homework.

You are encouraged to form "lab partnerships" of two or three persons (four maximum) to work together on the homeworks. Partnerships can turn in a single homework, signed by all members. However, your lab partners must be members of your experiment group (for the experiments, the class will be broken into several groups of roughly equal size, and the experiments will be run separately within each group).

You can save yourself quite a bit of time in doing your homeworks by using a computer spreadsheet like Microsoft  Excel, which is installed on all of the university's public-access computers and is widely available on home computers. We will make the data from your experiment group available in the form of an Excel file as well as in the form of a text file. For those who have not used a spreadsheet before, you will be directed to help in class. If you have never used a spreadsheet before, this is a good time to learn a skill that you are likely to find useful for many years. If you insist on not using a spreadsheet, the next best thing is a calculator that can calculate means and standard deviations.

Exams

There will be two midterm exams and a final exam. The dates and coverage of these exams are listed in the class schedule. You must bring a #2 soft lead pencil to each of the exams. No make-up exams will be given.

Determinants of Course Grade

You can miss one experiment without it lowering your attendance grade.
You can miss one homework without it lowering your homeworks grade.
Two midterm exams, each counting for 20% of your total course grade.
The final exam will cover material from throughout the course.

Extra Credit

There is extra credit associated with the experiments: See below.

Cheating is absolutely not tolerated.



Additional Course Information

Experiments:

This course is designed around a sequence of eleven experiments found in the Bergstrom and Miller text. Although experiments have been used in economics courses since the 1950s, this text represents the first attempt to teach microeconomic principles exclusively through experiments. Moreover, although I have run experiments in previous classes, this year represents my second attempt to rely so heavily on experiments. Consequently, you must come to class prepared to participate in the experiments. This mean reading the material in advance of the lectures, and arriving on time. There will be an incentive for you to do so (see extra credit below). The experiments should be quite entertaining as well as enlightening.

The benefits of experiments are they are more interesting and more convincing demonstrations of economic analysis than some professor (in particular, me) droning on about marginal this and opportunity that.

Sections:

The class is divided into five sections for the purposes of experiments. You will be assigned to a section the first day of class.

Supplementary Instruction Sessions:

Each week, there will be four supplementary instruction sessions, two each on Monday and Wednesday. The sessions on a given day are identical, but are different on different days. The Wednesday sessions correspond to the preceding Tuesday class, and the Monday sessions correspond to the preceding Thursday class. Participation in Supplementary Instruction is entirely voluntary: this is an additional resource to help you with understanding material, doing your homework, and preparing for exams.

Extra Credit:

Much of economic analysis concerns incentives. Whether we're looking at cheating on taxes, the market for marijuana, labor strikes, the cost of renting apartments in Austin, or the prices of used cars, the approach is to identify the incentives facing market participants. If I want you to exert effort in the course, I need to provide you with an incentive. Economists have found that subjects in economics experiments behave very differently when they are paid compared to when they aren't paid. In particular, if you can make money in an experiment, you have an incentive to do so, rather than day-dreaming. In this class, the incentive you have to participate actively in the market is extra credit.

There are 900 points up for grabs. (The total number of points available is three per student; with our estimated enrollment of 300, that means 900 points.) The way your share of these points will be computed is as follows. Throughout the semester, the TAs and I will track your "earnings" in the class. Earnings are denominated in *s, a currency known as the star. For example, in the first experiment, you will either be a buyer or a seller. If you're a seller, you will know what the object you're selling costs you. Suppose it costs you *2, and you sell it for *3.50. Then your earnings are *1.50. To compute your share of the extra credit points, I will add up the total points earned by all students who had positive earnings (that is, if you manage to lose on average, you won't be penalized). Your share of the 900 points will be the proportion of total earnings that you earned. Thus if the entire class earned *100,000, and you earned *500, your share is *500/*100,000 = 0.005. You would then get this share of 900 points, or 0.005 * 900 = 4.5 points. Your share is added to your final grade - in this example, 4 points of extra credit. The average student will get 900/300 = 3.00 points added to his or her grade. How much are you rewarded for effort? That depends on how much effort the other students invest in the experiments. Luck plays a role here, because in any particular experiment, you could, for example, be a low cost seller, making it easier to earn money. But the difference between vigorous effort and no effort will generally be three or four extra credit points added to your grade. Vigorous effort, of course, will increase your grade on exams and homeworks as well.

Homework:

Most weeks, you will have homework assigned. The schedule tells you exactly what and when to turn in. There are ten homeworks. The lowest score will be dropped in computing the average of your homework grade.

Each homework involves both questions about the data from your experiment and some general questions.

You are welcome to work in groups on homeworks, and turn in a single homework signed by all the members of the group. All members of a group must be in the same lab section, and the names and student numbers of the members clearly printed at the top.

Spreadsheets: If you have access to, and experience with, a spreadsheet program, you will find it easier to download the data from our web page and perform calculations with a spreadsheet. The data will be provided in Excel format as well as text format.
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