Experimental finance

Prof. Jean Paul Rabanal (jp.rabanal at colby dot edu)


In this class, you  will explore how financial theory can be analyzed using experimental methods. We will study asset pricing models in complete and incomplete markets; consumer/investor financial decisions (e.g. when to undertake a project or when to withdraw deposits); the emergence of money and banking institutions, and management decisions in corporate finance theory.

Throughout the semester, you will participate in classroom experiments, study lab techniques and design an original financial experiment.

Please visit the syllabus for further details on grading, office hours and what I expect in this class for Colby students.

Below, the materials that we are going to work throughout the semester.

Materials, announcements and assignments

Week 8

This is not a finance seminar, but if you attend, and talk to me about what you learned, you can earn points back from missing assignments.

Emily Beam (UV) Wednesday, April 4

4:00pm — 5:00pm Diamond 341


We test the impact of a summer employment programs for disadvantaged youth in the Philippines on medium-run employment and education outcomes. Enrollment leads to a 3.9 percentage point (70-percent) increase in employment 8-12 months after the program, and we attribute roughly half of this effect to students continuing work with their assigned employers after the program ends, primarily in the private sector. We do not see evidence that the program increases work readiness, soft skills, or job-search behavior, nor that it affects education outcomes. These findings highlight the potential role of such programs to facilitate school-to-work transition, although it raises concerns about the cost-effectiveness of doing so.

Week 7

Florida Break

Week 6

Week 5 

  • Notebook
  • Questions for the midterm (due Tue 3/13): total 100 points. you can discuss these questions with your classmates, but give credit for the ideas of others.
    1. Which findings from previous asset market experiments can help you to understand the results of Penaver et al? [20 points]
    2. Please formally derive the steady state solution using the parameters employed in the experiment by Lei and Noussair [10 points]
    3. What do you think that drives the deviations between the data and the predicted equilibrium in Crockett et al. against the findings of Lei and Noussair [20 points]
    4. Which result do you find interesting from  Kirchler et al. 2012? Why? [20 points]From The Atlantic: José Quiñonez has spent most of
      the past decade helping the financially invisible build credit and
      obtain loans. Last week, his commitment to helping low-income
      communities, which are so often excluded from the mainstream
      banking system, earned him \$625,000 in the form of a MacArthur
      genius grant. He’s one of 23 this year to win genius grants, which
      are given to people who have demonstrated unusual creativity, are
      highly accomplished in their field, and show they have significant
      potential. Born in Mexico, Quiñonez came to the U.S. as a child after his mother died of cancer, having been unable to afford medical care; his father had passed away before that. Quiñonez is well acquainted with the hardships that can face poor, undocumented immigrants in this county. In 2007, he helped found the Mission Asset Fund, a San Francisco-based nonprofit that helps those without access to the financial system build credit and get zero-interest loans. Quiñonez has successfully expanded the organization and enlisted several nonprofit partners since its inception.The Mission Asset Fund has asked you to assess the importance of
      credit score for individuals.  Note: you need to be clear on
      the research question that you would like to address.5. How would you design a lab experiment? (20 pts)6. Which format (lab or field work) is more adequate for this topic? (10 pts)

Week 4 Asset pricing

    • Notebook
    • Thursday: Proposal due.
    • By Tue: State few possible  questions you will investigate. Provide some motivation to the questions that you are interested. Please be ready to present or discuss your questions to the class.
    • Tue activity:
      1. Please compare the Euler condition of this week reading against the one we studied last class. Interpret.

Week 3: Production and Consumption (cont.)

  • Tue activity: read Lei and Noussair. Please answer the following questions in 1.5 pages:
    1. Is it possible to bring infinite horizon models to the lab? If so, how?
    2. Why capital has a price? What’s the predicted price?
    3. What is the result that you find more interesting?

Week 2: Methods. Production and Consumption

  • Notebook
  • Tue activity: read Chapter 1 and 2 of Friedman and Sunder (1994). In 1.5 pages, discuss the advantage and principles of experimental methods.

Week 1: Welcome!

  • Notebook
  • Game: Continuous Double Auction.
    1. Graph the supply curve, given the list of unit costs
    2. Graph the final demand curve, given the unit values
    3. Use the supply and demand graphs to make numerical predictions of price and quantity (assume that markets clear at single price)
    4. Using your previous answers, what is the predicted consumer surplus and the predicted producer surplus?