Introduction to the Handbook of Experimental Game Theory

Abstract

As for all sciences, economics continues to advance and evolve. It started as a subfi eld of philosophy and went through various phases influenced, in part, by advances in other disciplines. Economics in the late nineteenth century morphed from philosophy to its neoclassical phase, led by Alfred Marshall. Marshall wished to improve the mathematical rigor of economics and transform it into a more scientific profession. He was successful at this endeavor, and his book, Principles of Economics (1890), was the dominant economic textbook in England for many years, able to influence generations of economists throughout much of the twentieth century. With a solid scientific framework to organize economic thinking, the evolution of economics into an empirical science was inevitable. In 1944, John von Neumann and Oskar Morgenstern published Theory of Games and Economic Behavior . This groundbreaking book introduced a new paradigm of thinking about economic interactions, and completely transformed the way economists analyzed behaviors. Its influence reached into every sub-discipline, from industrial organization to labor economics to trade and development. Game theory inspired Leonid Hurwicz. Hurwicz (1945, 1960) developed the theory of mechanism design. Mechanism design has been useful for modeling voting, bargaining, taxation, auctions and other economic institutions. Almost contemporaneously, Vernon Smith (1962, 1976) started thinking of ways to empirically assess the performance of economic institutions. The dominant view in the 1970s was that economics was an observational science. It was believed that, unlike chemists or physicists, economists could not test theories in controlled environments. Peer-reviewed articles using the methodology of experimental economics were almost nonexistent until the mid-1960s. Vernon Smith challenged this view. Soon after Smith’s publications found themselves on economists’ desks, a large and growing community of researchers realized that controlled experiments represented a fruitful way to test propositions that were previously thought untestable. The effect of experimentation in economics, however, quickly went well beyond testing propositions. Indeed, experiments created a paradigm shift. In Vernon Smith’s (1989, p. 152) own words: ‘[e]xperimentation changes the way you think about economics ... economics begins to represent concepts and propositions capable of being or failing to be demonstrated.’ Smith shared the 2002 Nobel Prize in economics with Daniel Kahneman, one of the founding fathers of behavioral economics. The twenty-first century started with the recognition that experimental economics methods are important tools for advancing economics as a science. The aims of thisHandbookare twofold: to educate and to inspire. It is meant for researchers and graduate students who want to learn from leading experts in the field and who are interested in taking a scientific approach to the study of game theory. Educators and students of economics will find theHandbookuseful as a companion book to conventional upper-level