Economy Lab

At the heart of most scientific theories is an assumption of causality: some event A causes some outcome B. Lowering the interest rate causes spending to increase, empowering employees causes an increase in productivity, and advertising causes an increase in sales. Although passively observing social phenomena such as economic growth and company performance can be very informative, such passive observation does not allow a strong inference of causality, because there could be some third event C that causes both A and B, thereby creating the illusion that A causes B. If we want to provide the strongest possible test of whether A causes B, then we need to manipulate A and observe B, while controlling C (and D, E, F...). If advertising increases sales, then sales should be greater with advertising than without advertising, while other conditions remain unchanged. This is an experiment, and experiments are the gold standard of causality. They can be conducted in "the field", as when a manager tests whether teams of 4 designers or 5 designers produce better solutions, or in "the lab", as when a marketer tests which package consumers prefer. Recently there has been a dramatic increase in experimental research within the social sciences.

Experimentation in economics was pioneered by Nobel Prize winner Vernon Smith. Economic theory makes strong predictions about which market participants determine market prices and the number of goods bought and sold. Smith demonstrated that under experimental conditions considerably weaker than those required by economic theory, market prices and quantities indeed are fully determined by the costs and values of the small fraction of market participants predicted by theory, the marginal ones. Smith's work has led to a more granular understanding of how market institutions (laws and rules) influence market outcomes, and has influenced the design of centralized exchanges for stocks, electric power, and even emissions permits. Much of market exchange is determined by factors besides price, some markets function based on matching, whether it be romantic partners, medical residents and hospitals, or kidney donors and recipients. Nobel Prize winner Al Roth pioneered the bridging of the economic theory of matching markets with their design using laboratory and field experimentation. His treatment of economics as an experimental science has facilitated the practical understanding that allows for the economic engineering of new matching markets, which include markets for kidneys, medical residents, and even economists.

Much current research examines individual decision making and consumer behavior, work which has been heavily influenced by Nobel Prize winner Daniel Kahneman's introduction of cognitive psychology into economics. For example, suppose you're trying to decide what to do this evening: Do you prefer to attend a classical concert in the city, or stay home and watch a film? Surely your choice will depend entirely on your own preference, right? In cases like this, consumers' choices may be split between the two options; let's assume that 50% of people choose the concert and 50% choose the film. Now suppose we introduce a third option, which is to attend an opera. In this case, most people choose to stay home and watch a film. Why? Because many people consider a classical concert and an opera as similar events, they have difficulty discriminating between those two options, and this uncertainty leads many people to instead choose the film. As our colleagues in Decision Sciences, Economics, Management, and Marketing demonstrate, Bocconi has fully embraced this recent movement toward experimental research in the social sciences, and we can now be more confident in the causal assumptions underlying the theoretical knowledge generated and shared by researchers at Universita' Bocconi.