Vernon Smith
ICES Is a Leader in Experimental Economics
By Jeremy Lasich, B.A. '98
When a team of seven distinguished economics professors from the University of Arizona joined George Mason's faculty last year, many were reminded of James Buchanan, who won the 1986 Nobel Prize in Economics. That's because the team's lead economist and the "father of experimental economics," Vernon Smith, has been cited by the Washington Post as a potential Nobel winner himself.
Smith, along with Daniel Houser, Kevin McCabe, Mark Olson, David Porter, Stephen Rassenti, and Bart Wilson, brought the Interdisciplinary Center for Economic Science (ICES) to George Mason. Housed on the Arlington Campus, ICES consists of three broad sections of research and teaching: experimental economics, neuroeconomics, and economic systems design (ESD).
The main focus of the group's work in experimental economics is to use the lab to study markets, such as the New York Stock Exchange. In addition to the basic research in price formation in financial markets, experimental economics assists in public policy debates concerning price controls, subsidies, and other regulatory controls to better educate decision makers.
"Experimental economics has leaped to the frontier of modern economic science and is commonly considered the most important recent development in the profession," says Tyler Cowen, B.S. Economics '83, executive director of the Mercatus Center and associate professor of economics. "This group has the greatest concentration of expertise in the field."
Some of the economists' experiments take the form of games. One game, for example, is designed to test the extent to which trust may affect economic decisions.
"In that environment, a good half of our subjects use trust and the expectation of trustworthiness that enables them to do better and make more money," says Smith. "We call this reciprocity - I do something for you, you do something for me. Reciprocity is so strong in people that it even survives in anonymous interaction between strangers."
"The Interdisciplinary Center for Economic Science is not just a name; it represents something," says Porter. "The last part of the name refers to the use of experiments in economics. That's our method - being scientific. . . . Our research is interdisciplinary because it crosses over into engineering, psychology, computer science, and philosophy."
The economists are always looking to recruit test subjects for their experiments. All subjects receive a sign-up fee that varies with the opportunity costs. In a typical experiment, a person would be set in front of a terminal with instructions on how to make decisions and what the payouts will be in different scenarios. Any money earned during the game is the subject's to keep. Students and staff members are eligible to apply, and sometimes faculty members are used.
McCabe leads the center's research in neuro-economics, which explores how the brain works as people solve problems such as making choices between alternative actions, forming expectations about the future, carrying out plans, and engaging in personal and impersonal exchange with others.
"People seem to have a very natural propensity to trade with each other and exchange information or ideas, even goods and services at a very basic level," says McCabe. "Exchange probably has an evolutional advantage. Our argument is that if we're adapted for exchange, then the logical expression for that has to be in the brain."
ESD is a unique program offered by ICES. The main focus is the design, development, testing, and implementation of exchange systems, such as auctions to allocate public resources. ESD utilizes experimental methods in economics as a way to test new exchange systems.
"This is a central part of our teaching, especially in our new course offerings this fall; these courses are multidisciplinary, and can be taken by students in economics, engineering, computer science, mathematics, and so on," says Smith.
For more information, visit www.ices-gmu.org. To sign up for an experiment, visit ices1.gmu.edu.