Thursday, May 19, 2022

A class experiment about investing in Venezuela and Switzerland

With the help of Erik Solé, a teaching assitant, I ran a class experiment (in my Introduction to Economics course at the new degree on Contemporary History, Politics and Economics at my University, UAB) using the instructions of the e-book “Experiencing Economics” of the CORE Project, based on the very useful Classex platform of experiments in class with mobile phones.

One of the experiments suggested by this e-book consists of asking students to play a “Coordination Game” where they have to decide whether to invest or not in pairs. It is a 2x2 game where they are randomly paired with another (unknown) student. They have 5 units of payoff to invest, and these 5 units become 10 only when both players invest. If you invest and your couple does not, you lose your 5 units.  Each pair is secretely told in the instructions that he or she is in one of two specific countries, one suggesting a narrative of stability and another one of instability. Instead of Germany and Greece (the countries originally suggested by the Classex platform, incidentally located in a German university), I changed the names of these two countries to Switzerland and Venezuela. I thought that the contrast of messages would be clearer in the current context. Britain and France after the Brexit referendum was another variation that is mentioned in the e-book to having been used by others previously -with similar results to our experiment.

The results of the experiment were striking, although in line with previous similar experiments.  77% of the pairs of students that received a message saying that they were in Switzerland, coordinated in the efficient outcome (both players invested), and none of them coincided in the non-investment outcome. In the rest of random pairs, one student invested and the other did not.

However, of those that were suggested to think that they were in Venezuela, only 22% of pairs coordinated in the joint investment outcome (although the payoffs were the same). 33% of these pairs coincided in choosing not to invest simultaneously, and in the rest of pairs, one student invested and the other did not.

77% versus 22% is a big difference, which I didn’t expect. It is consistent with similar games having been played in other universitites, according to the e-book “Experiencing Economics” of the CORE Project.

Experiments in class using smartphones are an engaging way to explain simple economic and game-theoretic models. Coordination is important, and narratives and expectations may help explain why it is challenging, and the absence or presence of trust may explain investment cycles and many other social and economic phenomena.

At our University, UAB, we will have in July a workshop to diffuse to other teaching Faculty the usefulness of these experiments and other ideas and resources to innovate in the teaching of Economics.

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