Experimental finance

Experimental finance is a branch of economics that uses experimental methods to explore and understand the behavior of financial markets. It is a relatively new field, but it has already made significant contributions to our understanding of how markets work.

Overview

Experimental finance is a methodological approach that involves conducting controlled experiments to test theories and models of financial behavior. These experiments can be conducted in a laboratory setting, where participants are asked to make decisions in a controlled environment, or in the field, where researchers observe and analyze real-world financial transactions.

The goal of experimental finance is to provide empirical evidence that can be used to test and refine theories of financial behavior. This can help to improve our understanding of how markets function and how individuals make financial decisions.

History

The field of experimental finance has its roots in the broader field of experimental economics, which began to develop in the 1940s and 1950s. Early pioneers in this field included economists such as Vernon Smith, who won the Nobel Prize in Economics in 2002 for his work in experimental economics.

Experimental finance began to emerge as a distinct field in the 1980s and 1990s, as researchers started to apply experimental methods to the study of financial markets. This was driven in part by the development of new technologies that made it easier to conduct experiments and collect data.

Methodology

The methodology of experimental finance involves designing and conducting experiments that simulate financial markets or decision-making scenarios. Participants in these experiments are typically asked to make decisions about buying and selling assets, investing in different types of securities, or making other financial decisions.

The results of these experiments can then be analyzed to test theories and models of financial behavior. This can provide valuable insights into how individuals and markets behave in different situations, and can help to identify factors that influence financial decision-making.

Applications

Experimental finance has a wide range of applications. It can be used to test and refine theories of financial behavior, to explore the effects of different market structures and regulations, and to investigate the impact of various factors on financial decision-making.

In addition, experimental finance can also be used to develop and test new financial products and services. By conducting experiments, researchers can gain insights into how consumers might respond to these products and services, and can use this information to improve their design and marketing.

See also

• Behavioral finance
• Financial economics
• Experimental economics
• Game theory