Among Vernon Smith's precepts for valid microeconomic experiments is 'dominance', whereby the payoff function needs to be sufficiently peaked so as to more-than offset the psychological costs of supplying the null-hypothesis response.
Yet, dominance is not a consistent feature of current behavioral economics and experimental economics. Experiments designed specifically to satisfy dominance are the exception, rather than the rule. At first sight, this appears to be cause for concern, at least from a conceptual standpoint.
In your experience, why has the profession (editors and referees) allowed the dominance precept to fall into the "not required" category, and why is it a superfluous methodological requirement -- or is it?
Kim,
This precept seems to be very broad and general, which may be a problem. I have trouble interpreting it without context. If the null hypothesis refers to a general or default position: that there is no relationship between two measured phenomena -- I want to be able to explain "what is the psychological cost?" and "why would the psychological cost supply the null-hypothesis?"
I just posted a working paper yesterday which makes what I think is an important contribution to exp labor economics -- to show that incentive effects are hard (or impossible) to detect, without the presence of valid (desirable) leisure alternative. you can check it out here: http://ssrn.com/abstract=2320240
maybe this gets at something relevant regarding "psychological costs" and null hypotheses...
Vernon is very fond of saying that one of the big findings of experimental economics is "change the context, and you can change the outcome". What he means, is that people don't run standard utility functions in their heads. Vernon is a "non-utilitarian"thinker, he prefers to think about how individuals invoke socially appropriate responses to contexts - ala Adam Smith.
Experimental works that Vernon has often referred me to to back up his point about how context is everything are these:
Cherry, T. L., Frykblom, P., & Shogren, J. F. (2002). Hardnose the dictator. The American Economic Review, 92(4), 1218-1221.
Cherry, T. L., Kroll, S., & Shogren, J. F. (2005). The impact of endowment heterogeneity and origin on public good contributions: evidence from the lab. Journal of Economic Behavior & Organization, 57(3), 357-365.
Now, this said, I'm not sure if I have even understood your question properly, or even done any work to address it.
Maybe a response from you will help me develop my thinking on this...
Kim,
Here should have been the first part of my response:
The "dominance precept" I interpret as a fundamental of incentivized experimental economics = that monetary incentives are crucial. The hazard of studying economic decisions without monetary incentives is that participants might be inclined to give random responses or responses that require least effort.
Vernon is quick to point out that a major discovery inferred across exp economics studies is that, often, changing the level of incentives offered matters little - this may be why we hear little about testing the dominance precept...
Colin Camerer has some work on comparing decision tasks across psychology (where monetary incentives are rarely used) and exp econ. He found that often the incentives don't matter, but sometimes they really do.
Now, there are several problems with assumptions about incentives mattering:
(1) they may backfire, crowding out intrinsic incentives (e.g. see work by Sam Bowles), (2) response to monetary incentives may not be properly attenuated in experiments if alternatives to those incentives are not available (as they arguably are in the real world), and (3) context matters in framing how participants are to think about the available incentives (e.g. have they earned them, are they windfalls or "pie from the sky", etc.).
Eric,
So the dominance requirement -- which is a methodological, experimental design condition on the 'peakedness' of the payoff function when testing null hypotheses derived from economic theories -- has tumbled down the priority list because of more general questions about whether incentives matter at all.
This seems eminently plausible.
I would also conjecture that it has fallen by the wayside because no recognised general-purpose procedure exists with which dominance may be verifiably implemented in our experimental designs. And many of our experimental design favourites -- such as the Random Lottery Incentive scheme -- create separate impediments. The closest approximation seems to be the inclusion of a "multiply payoffs by the factor X" treatment condition, where X is set sufficiently high (e.g. 10, or 100) so as to pre-empt any criticisms citing insufficient peakedness of the payoff function.
Incidentally #1: I particularly like the Hardnose paper/result. At first glance, there would seem to be some scope for trying this sort of approach in the decision making under risk and uncertainty context as well.
Incidentally #2: the Hardnose result reminds me of Winking & Mizer (2013) Natural-field dictator game shows no altruistic giving, Evolution and Human Behavior. These authors erase altruistic giving with a design that involves an experimenter with a bag of casino chips, a confederate, and an unaware member of the public standing at a Las Vegas bus stop.
Useful discussion! I agree with Kim's conjecture that we have stopped using the term dominance because we do not have a procedure for clearly identifying it. That would require measuring "the psychological costs of supplying the null-hypothesis response." and comparing to incentives. In principle this might be done but it is not straightforward.
It's very pleasing to see you pick up on this thread, Colin! A co-author and I have attempted to develop an instrument for gauging the monetary value of the costs of supplying the null-hypothesis response (see attached paper). It falls somewhat short of being an ideal general-purpose tool, of course. In the table below, a decision maker is indifferent between Alternatives A and B under the EU null hypothesis. Thus under the null hypothesis the decision maker is free to choose either A or B in line 6. But any failure to choose Alternative A in lines 1--5 and to choose Alternative B in lines 7--11 is inconsistent with the null hypothesis. Furthermore the magnitude of the largest bonus forgone is a lower-bound measure of that 'psychological cost of supplying the null-hypothesis response'.
What has surprised me is that this dominance-aspect of the paper has attracted literally no comment whatsoever from editors and referees.
Article Alternation Bias and Reduction in St. Petersburg Gambles: An...
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