Consistent with its role in studying economic behavior, the types of experiments that would be performed in the lab fall into three broad categories:
(1) studies of individual decision making behavior;
(2) studies of strategic behavior in groups (i.e. tests of equilibrium); and
(3) studies of how the design of institutions and markets affects welfare.
Specifically, in studying individual decisions, our primary interest will be in assessing the extent to which standard assumptions of economics are, or are not, followed by experimental subjects, what systematic variations there are from those assumptions, and what impact this has on individual choices. In studying strategic behavior, our main interest is in finding classes of situations in which standard economic concepts of equilibrium succeed (or systematically fail) in predicting strategic behavior in games or markets. Finally, we see our lab as providing a test bed for the design of legislative, economic, and social institutions (e.g., effective deregulated energy markets) with particular care given to the intersection of psychology and economics in the design of these institutions.
The users of the laboratory will come from almost all areas of the social sciences, especially those interested in individual choice and economic outcomes. Investigators will be drawn from diverse units on the Berkeley Campus including the Goldman School of Public Policy, the Haas School of Business, the Department of Agricultural and Resource Economics, the College of Letters and Sciences, the School of Information Management and Systems, and the College of Engineering. Within the School of Business, it will include researchers from the areas of finance, marketing, economics, and organizational behavior. In Arts and Letters, users will come from areas as diverse as economics, political science, psychology and sociology.
Fundamentals of Individual Behavior. Psychologists and economists are currently exploring together a wide variety of ways in which individual behavior deviates from the standard utility maximization traditionally assumed of economic agents. These endeavors take two forms. First, economic agents may have one function that expresses their true welfare, yet they may maximize another. Psychologists have developed remarkably clever tests to demonstrate such seemingly contradictory behavior. An alternative hypothesis is that economic agents are maximizing correctly, but that conventional economic assumptions about just what matters to them are incorrect or incomplete.
Empirical work with standard utility theory as the benchmark has established a whole array of deviating behaviors. First, individuals are biased by their anchors; they are present oriented; they fail to take into account the extent to which they will adjust; they can be cued by their location or very special circumstances; categorization leads them to make cognitive biases; they are loss averse; they suffer from different forms of money illusion; their view of others' behavior is not symmetric with their view of their own; they fail to fully adjust for probabilities; they are usually overconfident, but sometimes under confident. In addition to having such biases, individuals also have unusual arguments in their utility functions. They respond to situations they consider unfair. Especially, they have a desire for reciprocity, as they wish to be nice to those who are nice to them, but also nasty to those who are nasty to them. All of the above behaviors have been initially uncovered and are making their way into economics through psychological studies, mainly using laboratories, occasionally from field and historical observation. In addition, the basic sociological behavior, which describe how people group themselves together as "we" vs "they"-that is, how they identify themselves-has been explored extensively in psychological laboratories. This latter topic, which joins economics, psychology and sociology, is now also becoming a focus of work in economics, especially at Berkeley.
It has long been shown that individual decision making depends upon how a situation is framed. Indeed, the classic social psychology findings of Milgram, Asch and Tajfel, that individual decision-making is remarkably determined by perceptions of the context, has been demonstrated over the gamut of almost all social psychology and economic experiments. These results should not come as a surprise; they reflect the dictum from sociology that behavior depends upon the "definition of the situation." But by bringing scientific precision to this dictum, the economic and psychological laboratory has shown how this wisdom from sociology in fact applies to a wide variety of decision-making and expands greatly behavior, beyond the traditional model of economic man. Matthew Rabin of Berkeley has been prominent in translating these findings into revisions of standard economic models.
In sum, then the wide range of deviations from maximization of utility with only classic economic arguments in the utility function is the subject of laboratory experimentation. This exploration, which has been central to the development of behavioral economics, necessitates the use of laboratory facilities.