From Lab Experiments to the Field: The Case of a Price Formation Model Based on Laboratory Findings

Abstract

Lack of generalizability appears to be at the center of the considerable resistance concerning laboratory evidence in economics research even though arguably laboratory experiments are a major source of knowledge in the social sciences (Falk and Heckman 2009). Traditionally researchers add more variations to the chosen dimensions of the existing experiments to extend the lab results to the field. We propose an alternative approach – building empirically oriented models from lab data and demonstrating the applicability of the model to field data. As an illustration we form an explicit representation of how the prices emerged as a consequence of individuals’ engagement in exchanges. We model such a sequential price formation process based on double auction data with and without information frictions and show that it is possible using such a transparent model of behavior of agents in a market to produce price sequences that have properties described across a variety of archival settings. We believe that this exercise is an important step in attempting to integrate theoretical, experimental, and archival work in accounting, economics, and finance.