Experimental Economics

From Newsweek:

Companies are always trying to predict the future. These days, the field of experimental economicswhich replicates market and business scenarios in the labis giving the crystal ball an upgrade.

Hwelett-Packard scientists, for example, have created mini-markets that allow its executives to bet on, among other things, future sales and revenue. The internal futures markets do a better job of predicting than simply polling the executives because anonymous bids bypass office politics, and cash rewards (up to $250 for the best bets) provide extra incentive. Another of its fortune-telling exercises uses Stanford students acting as HP execs, retailers and suppliers in a kind of Simbusiness test of new strategies.

Testing economic theories through experiments sounds like a no-brainer, but it wasnt always so. Vernon Smith, a professor at George Mason University, began doing it in 1956. Over the years, he and others like Caltech professor Charles Plott crafted experiments that proved markets predictive power. Their work has influenced policy decisions on issues like airport-landing rights. Last year Smith was awarded the Nobel Prize.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.