Appendix A: Suggested Economic Experiments to Accompany Behavioral Economics
While learning about behavioral economic concepts and models can be useful, often students struggle to first admit that they fall prey to many of the same anomalies that they are learning about. It is really only after we admit we are susceptible that we can learn ways to avoid such anomalies. Economic experiments have long served as a means for researchers to demonstrate anomalous behavior. However, participation in economic experiments can also serve to cement in the behavioral economics students understanding an intuitive notion of the fundamentals of behavioral economics. For this reason, I am providing a set of experimental protocols that should be relatively easy to implement in most college classroom settings. These experiments are designed to accompany the materials from the chapters of Behavioral Economics. From experience, these exercises tend to work best when students first participate in an experiment, and then the data from the experiment is used to teach about the anomalous behavior of interest. In order to avoid the situation in which students use what they have learned from their readings to perform in a superior way in these exercises, it may be worthwhile to complete the experiments a week or two prior to covering the material and assigning the readings in the text. This makes it difficult for a student to convince themself that they are not subject to the same anomalous behavior that their peers are. Moreover, the experiments can provide a point of engagement and excitement that is difficult to obtain in most courses in economics or business. These experiments work best when students are motivated by monetary rewards. In many schools it will not be possible to provide these from the general instructional budget. Alternatively, it may be worthwhile to charge students a small fee to participate in the class (e.g., $40) and using this pool of money to reward students as they participate in experiments throughout the semester. Generally the students may participate in experiments with rewards or penalties accruing to their account. The money in this account is then distributed at some later date. In the descriptions below I refer to experimental dollars. Instructors may use actual dollars in place of these experimental dollars. Alternatively, it may be useful to create experimental dollars from small chits of paper that can be exchanged either for actual dollars or course credit at some later point. Most of these experiments are best to run with a group of 25 to 35 students. This may necessitate dividing the class into sections for days when experiments will take place. While these suggested experiments provide a solid basis for learning, many other experiments are freely available on the web and can add to the experience.
All-You-Can-Eat Candies
(Supports Chapter 2)
Purpose: The purpose of this experiment is to demonstrate the sunk cost fallacy using a simple and inexpensive experiment.
Materials: The instructor will need:
i) A large bowl full of candies – more than the entire class would eat in a setting. These should be candies that can be eaten in approximately continuously varying amounts (e.g., M&Ms, Nerds) and that are generally desirable.
ii) Paper cups that can be used to dole out small amounts of the candy.
iii) Experimental dollars ($4 worth for each participant).
iv) Small slips of paper.
v) An even number of poker chips and an opaque bag or bowl to draw them from.
vi) A pen.
Preparation: Place the large bowl of candies on a table that is visible to all participants. Upon each poker chip, write a price. Half of the poker chips should list a higher price, like “Price = $2”, while the other half should list a lower price, like “Price = $1”. These prices should be chosen to be appropriate to the particular participants and their value for access to the candy chosen. The higher price should be low enough that most will be willing to pay this price for access to the candy. Write a participant number on each cup to allow you to keep track of how much was eaten by each and which price they paid.
For the Instructor: As class members arrive, hand each one a slip of paper. At the same time, hand each class member $4 worth of experimental dollars. Once all have arrived, begin by reading aloud the For the Participant instructions. Ask if there are any questions regarding the procedure. Instruct them to write down their maximum willingness to pay for the candy. Then, call each student to the front of the class one at a time. Allow each student to draw a poker chip to determine the price. If the price is below their willingness to pay, take the necessary number of experimental dollars as a fee, and give the student a cup with a pre-determined number of pieces of candy (e.g., 10). Remind them that these may be eaten at the pleasure of the participant—but cannot be shared with any other classmates, nor removed from the classroom. Once these have been eaten, the student is allowed at any point during the class to return to the front and receive another serving. Inform them that they will need to return any uneaten candy to you in this cup at the end of the class. The number of candies in a cup should be chosen to be small enough that most students will want to return at least once, and many will want to return 3 or more times. Note on a piece of paper the subject number from the cup, and keep track of how many times the student returns for more candies. Also note the price each student pays, as well as their willingness to pay next to their participant number. Students may participate in other instruction, or an exercise (such as Reference Dependent Demand below) in the remaining class time. At the end of the class, collect all uneaten candy and use this and the number of refills each participant received to determine how many candies each student ate.
For the Participant: You will now have the opportunity to purchase access to all-you-can-eat candy with the experimental dollars you have been given. Those who purchase access to all-you-can-eat candy will be given a paper cup with ___ pieces of candy in it. You may not share this or any candy with anyone else in the class. You may not remove any piece of candy from the classroom at the end of the class today. You may eat the pieces of candy at your pleasure throughout the class. If at any time after purchasing access to the candy you run out, you may return to the front of the class for a refill of your cup.
In order to purchase access to the candy, you must first place a bid. Each of you will write down the highest amount you would be willing to pay to obtain access to all-you-can-eat candy on your slip of paper. The highest bid you are allowed to write down is $4. Once you have written down the most you would be willing to pay, the price for access will be determined. Your price will be determined in the following way. The instructor will call you to the front of the class and ask you to blindly draw a poker chip from a bag (or bowl). This poker chip will have a price written upon it. If this price is above your maximum willingness to pay, then you will not purchase access to the candy. If this price is below your maximum willingness to pay, you will pay the price on the poker chip, and be given access to the candy. All remaining experimental dollars will be yours to keep. It is in your best interest to write down the greatest amount your would be indifferent between retaining, or giving up in exchange for access to the candy. If you bid too little, you may end up forgoing the candy when you really want it. If you bid too much, you may end up losing more money than the candy is really worth to you.
Suggestions for Use in Lecture: The key to this experiment is to use the willingness to pay data to eliminate selection bias. If we simply compare the number of candies eaten by those who pay the high price to the number of candies eaten by those who pay the low price, any difference may be due to the fact that those with higher willingness to pay also like candy a lot more. Instead, select only those who were willing to pay more than the higher price for your analysis. The analysis is most easily presented by comparing the mean number of candies eaten for the higher price to the mean number eaten for the lower price. A simple difference in means test could be presented if the background of the students includes statistics. In general we find that those who pay more (given that all were willing to pay either price) tend to eat more, demonstrating that they were eating to get their money’s worth rather than based on independently declining marginal utility of consumption. This can be a powerful example when presenting sunk cost fallacy in classroom lectures.
Reference Dependent Demand
(Supports Chapter 2)
Purpose: These hypothetical questions are designed to demonstrate that students tend to base their evaluations of worth and utility on context.
Materials: The instructor will need:
i) Two sets of answer sheets printed from the section below, For the Participant
Preparation: Shuffle answer sheets so that they can be distributed randomly to students in the class.
For the Instructor: Distribute the materials to students, and ask them to read and answer all questions. Remind students not to discuss the questions with one another.
For the Participant:[1]
Form A:
I. Imagine that you are going to a sold-out hockey playoff game, and you have an extra ticket to sell or give away. The price marked on the ticket is $5 which is what you paid for each ticket. You get to the game early to make sure you get rid of the ticket. An informal survey of people selling tickets indicates that the going price is $5. You find someone who wants the ticket and takes out his wallet to pay you. He asks how much you want for the ticket. Assume that there is no law against charging a price higher than that marked on the ticket. What price do you ask for if
1. He is a friend_______________
2. He is a stranger_________________
What would you have said if instead you found the going market price was $10?
3. Friend _______________
4. Stranger________________.
II. You are lying on the beach on a hot day. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite brand of soda. A companion gets up to go make a phone call and offers to bring back a soda from the only nearby place where beer is sold a fancy resort hotel. He says that the beer might be expensive and so asks how much you are willing to pay for the beer. He says that he will buy the beer if it costs as much or less than the price you state. But if it costs more than the price you state he will not buy it. You trust your friend, and there is no possibility of bargaining with the bar- tender. What price do you tell him?
Form B:
I. Imagine that you are going to a sold-out hockey playoff game, and you have an extra ticket to sell or give away. The price marked on the ticket is $5 but you paid $10 each for your tickets when you bought them from another student. You get to the game early to make sure you get rid of the ticket. An informal survey of people selling tickets indicates that the going price is $5. You find someone who wants the ticket and takes out his wallet to pay you. He asks how much you want for the ticket. Assume that there is no law against charging a price higher than that marked on the ticket. What price do you ask for if
1. He is a friend_______________
2. He is a stranger_________________
What would you have said if instead you found the going market price was $10?
3. Friend _______________
4. Stranger________________.
II. You are lying on the beach on a hot day. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite brand of soda. A companion gets up to go make a phone call and offers to bring back a soda from the only nearby place where beer is sold a small, run-down grocery store. He says that the beer might be expensive and so asks how much you are willing to pay for the beer. He says that he will buy the beer if it costs as much or less than the price you state. But if it costs more than the price you state he will not buy it. You trust your friend, and there is no possibility of bargaining with store owner. What price do you tell him?
Suggestions for Use in Lecture: For questions I and II, compare the mean responses of students for each of the answers. The questions posed on form A and form B are identical aside from the context given in questions I and II. Students in question I will have a tendency to value the tickets according to how much they paid for them. Thus, we should see higher average responses for form B, that paid $10, than A, that paid $10. Alternatively, individuals tend to expect higher prices at a resort than at a grocery store. Thus, we should find students with for A giving a higher mean willingness to pay than those with Form B in question II. These could be presented with simple means, or including t-tests for differences in the means if appropriate for the class and number of students. Question III on forms A and B are identical. Further, the outcomes from the questions in III are all financially identical, and thus would lead one to think that there is no difference in how happy each individual is. Nonetheless, if you present the total percent circling A, B, and “No Difference” from both Forms A and B you will most often find that students believe Mr. A is better off in 1 and 2, and B is better off in 3 and 4. This can be useful in introducing the notion of reference dependent demand.