Pairing Multi-Market Theory with Experiments

Forthcoming, Handbook of Experimental Finance, Sascha Füllbrunn and Ernan Haruvy (eds), Edward Elgar Publishing

22 Pages Posted: 27 Dec 2021 Last revised: 10 Jan 2022

See all articles by Elena N. Asparouhova

Elena N. Asparouhova

University of Utah - David Eccles School of Business

Peter Bossaerts

University of Melbourne - Department of Finance; University of Cambridge

Sean Crockett

Chapman University

Date Written: December 27, 2021

Abstract

Experiments constitute an indispensable tool to validate the building blocks of the theories which economists use not only to interpret events in the real world but also to inform regulation and economic policy. This is especially true in the context of multiple, interacting markets, which is the domain of most of asset pricing theory. We illustrate how theory and experiment interact using the example of lending when borrowers are better informed than lenders about the quality of their projects. We show how experiments identify the boundaries of inference from field (archival) data, in particular when such inference is aimed at informing regulation. We also discuss how experiments can become invaluable pedagogical tools in teaching. Good experimental design brings to life the – often abstract – assumptions behind the theory, and students’ cognitive and emotional engagement in the virtual world of the experiment facilitates comprehension and retention.

Keywords: asset pricing, general equilibrium, laboratory experiment, markets, Pareto efficiency, classroom experiment

JEL Classification: C90, D53, G11, G12

Suggested Citation

Asparouhova, Elena N. and Bossaerts, Peter L. and Crockett, Sean, Pairing Multi-Market Theory with Experiments (December 27, 2021). Forthcoming, Handbook of Experimental Finance, Sascha Füllbrunn and Ernan Haruvy (eds), Edward Elgar Publishing, Available at SSRN: https://ssrn.com/abstract=3994448

Elena N. Asparouhova

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Peter L. Bossaerts (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Department of Finance
Carlton, Victoria 3010
Australia

HOME PAGE: http://bmmlab.org

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Sean Crockett

Chapman University ( email )

Orange, CA 92866
United States

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