Teaching economics with classroom experiments

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Charles A. Holt* Southern Economic Journal, January 1999, 65(3), 603-610

Abstract Classroom experiments are effective because students are placed directly into the economic environments being studied. This paper surveys some diverse applications, e.g. speculation and multiple markets, coordination games, voting and agendas, and a simplemacroeconomy, with particular attention to practical details. After participating, students bring first-hand experience to the discussion, which enhances the effectiveness of the Socratic method, as opposed to traditional lectures. The papers surveyed here also enable bright undergraduates to run the experiments on their own classmates and lead the ensuing discussions, which creates a special kind ofteaching/learning environment.

JEL codes: A22, C92

1. Introduction One of the most exciting recent developments in the teaching of economics is the increased use of classroom exercises that insert students directly into the economic environments being studied. For example, students who participate in market trading as buyers and sellers come away impressed with the strong pressures to trade at auniform price. This reaction is then mixed with surprise when they later discover that the observed price standard is the competitive price determined by the intersection of supply and demand functions constructed from information that was not available to any single trader. Even when standard theories fail, they can fail in interesting ways, e.g. when trading prices for assets veer away frompresent value fundamentals during price bubbles (Ball and Holt, 1998). Regardless of the outcomes of classroom experiments, the structural parameters of standard theories are determined by individual incentives and the rules specified in the instructions, so theoretical predictions can be calculated and used as a benchmark of comparison. As economics has become more technical, even at the undergraduatelevel, the use of classroom experiments provides an important connection between theories and key features of the markets and institutions being studied. Before surveying specific applications, it will be useful to discuss the origins and role of classroom experiments, as well as some general advice about procedures and pitfalls.

A revised version of this paper will appear in the SouthernEconomic Journal, as an introduction to a Symposium on Classroom Experiments. I would like to thank Jonathan Hamilton and Susan Laury for comments and suggestions.


2. Origins and Uses of Classroom Experiments Traditionally, economics has not been an experimental science, and this fact has shaped the kinds of questions addressed and arguments presented. Keynes (1936) stressed the importantrole of

conversation and criticism in evaluating economic arguments, "...where it is often impossible to bring one’s ideas to a conclusive test either formal or experimental."1 As a result, theories often rose or fell in popularity on the basis of generality, mathematical elegance, or clever terminology. Samuelson (1947) noted that economics lacked the "self-cleansing" nature of a hard science,and therefore he stressed the methodology of deriving comparative statics predictions of changes of observable variables. Ironically, at about the same time, Chamberlin (1948) was conducting the first in-class market experiments, which began a process of changing what we think of as being observable. Chamberlin had his students (doctoral students at Harvard) circulate around the room and bargain.Some were sellers, with numbered cards that determined their costs, and others were buyers, with numbered cards that determined their redemption values. Once a price was negotiated, the seller would earn the difference between the price and the cost, and the buyer would earn the difference between the redemption (or "resale") value and the price. The use of cards (e.g. playing cards) to distribute...
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