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Edgy - Revealed Preferences and General Equilibrium in the Laboratory // 2014 - Present // SES-1357867

General Equilibrium (GE) theory is the mathematical framework that economists use to understand how markets generate prices and distribute resources within a society. However, GE is impossible to directly test in the field because a primary input, the preferences of individuals, is private information not known to outside analysts. Working in the laboratory over several decades, some economists have instead tested aspects of GE theory by inducing artificial preferences. In parallel, another group of economists has studied how to measure the actual preferences of individuals, using a different body of theory called “Revealed Preferences” that infers individual preferences from choices made in the face of varying prices and income levels.

Our first project begins with a slight variation on a prominent revealed preference approach to portfolio choice. Subsequent projects incrementally transform simple preference elicitation into state-of-the-art market trading institutions. Individual decision-making tasks are gradually transformed into full-blown interactive markets, but the mechanics of making choices remains nearly identical throughout, allowing us to reliably compare behavior across settings. A suite of new software tools, called Edgeworks, will implement the entire sequence in a unified visual framework. This research will give insight into the efficiency and stability of interdependent (multi-good) markets, especially important aspects of financial markets. It will also help reveal the robustness of elicited preferences in the face of market experience, including recently controversial aspects such as small stakes risk aversion and reference dependence.

Emergent Networks // 2016 - Present

Using a complete set of transactions within an online trading community, we construct networks of traders and goods, and track them over time. The trading platform was designed to make barter exchange as attractive as possible, and excluded obvious money goods such as gold coins. Yet, within weeks, several specific goods emerged spontaneously as media of exchange and later, various sorts of intermediaries appeared. Eventually, trade was predominantly money-mediated, and the presence of intermediaries apparently reduced transactions costs, especially for larger transactions.

Games Played in Continuous Time // 2017 - Present

This is the first oTree/Redwood project. We are building software to conduct laboratory experiments with two-person matrix (i.e., bimatrix) games. The bimatrix games are played in either discrete or continuous time and allow for either mixed or pure strategy selections. The project includes pilot sessions as of May 2018. We plan to develop other sorts of two person and multiplayer games with a wider array of different game conditions in the near future.

Google Ad Auctions // 2014 - Present // Google Ad Auctions

Two different basic auction formats are currently used in online ad auctions. Facebook uses Vickrey-Clarke-Groves (VCG), while Google and others have used mainly Generalized Second Price (GSP). Which format is more efficient in creating value? How is surplus split between buyers and sellers? Do bidders converge to equilibrium behavior? Answers are of real interest to economists and are potentially very valuable to organizations that sell online ads, yet so far there is remarkably little knowledge, at least in the public domain. We use laboratory experiments to compare the formats’ efficiency and revenue capture, using proprietary software that enables real-time bid adjustment.

High Frequency Trading // 2016 - Present

We have launched a laboratory and field study of high-frequency trading and financial market design. The study will incorporate essential features of financial markets and investigate which market formats best promote liquidity, stability, and efficiency. It will contribute to fundamental knowledge of financial markets and, as a practical matter, provide crucial evidence for improving the design of major financial markets worldwide. A major component of the research will be to develop an exchange platform that emulates the hardware and software of actual financial exchanges. Laboratory subjects will be tested in a variety of environments, through interfaces that serve as algorithmic templates and which communicate directly to the remote exchange platform. Large-scale tournaments, under differing environments and market formats, will be run on a more realistic time scale (e.g. days) and will be comprised of hundreds of participants who will compete for trade profits and prizes. In contrast to the laboratory environment, where the computer interface will serve as a layer of abstraction between the subject and the algorithm that places orders at the exchange, the tournament participants will use template algorithms and an interface to connect directly to the messaging server. Furthermore, the software will allow for flexibility in algorithmic design, so that participants can implement a variety of self-designed trading strategies.

oTree/Redwood Software Development // 2017 - Present

LEEPS Lab has started to build twenty-first century software infrastructure for conducting a wide variety of human subject experiments. The infrastructure is open sourced, taking advantage of recently developed and innovative general tools for collaborative software development. The software will utilize the increasing power and sophistication of modern web browsers as well as recent trends (in industry, academia, and policy circles) to conduct experiments online. The software, called oTree/Redwood, will be freely available, easy to use, and adaptable to new experimental treatments.

Archived Projects