The Power of Controlled Experiments
At the LIPNE Lab, we believe that fundamental research is the cornerstone of scientific progress. Our core methodology revolves around controlled experiments, a crucial tool for testing and refining theories. While field data is valuable, we know that true scientific discovery cannot happen without the precision and insight that controlled experiments provide. Science cannot happen without controlled experiments.
In the realm of financial economics, there’s a common misconception: the idea that one cannot experiment with “big” objects like trillion-dollar markets. Instead, many rely solely on theory and field studies, drawing parallels with astronomy, where massive celestial bodies are observed rather than experimented upon. However, what these economists overlook is the crucial importance of laboratory experiments in astronomy. Laboratory experiments are essential in astronomy, validating the ‘lenses’ through which astronomers observe space, no matter how small these experiments may be compared to, for example, the sun or galaxies.
“Before we are allowed to combine them with observations, […] the ‘first-approach’ theories must be processed through the laboratory where many of their ingredients will no doubt be filtered away. This is the only way of building up astrophysics with a minimum of speculation. We have to learn again that science without contact with experiments is an enterprise which is likely to go completely astray into imaginary conjectures.”
— Alfvén and Arrhenius (1976)
In economics, there’s a tendency to propose abstract equations that describe how the world should work and then use sophisticated econometrics to fit these equations to real-world data. If the fit is good, the theory is often declared “right.” However, this approach can be misleading, just as it would be in physics if we still believed in an Earth-centered solar system, complete with epicycles, simply because it fits the observational data. A theory must be squared with fundamental principles, established through experimentation, to be truly valid. Even great physicists, like Richard Feynman, recognized the necessity of grounding beautiful theories in reality through experiments.
“It is a very beautiful line of reasoning. The only problem is that perhaps it is not true. (After all, nature does not have to go along with our reasoning.) […] It turns out experimentally, in fact, to be true.”
— Richard Feynman
Economics must follow the same path. We cannot rush to explain complex real-world phenomena without first mastering the basics, just as natural scientists have done for centuries. Predicting the weather without understanding basic fluid dynamics, or the climate without grasping chemistry, is doomed to fail.
“Whoever, in the pursuit of science, seeks after immediate practical utility may rest assured that he seeks in vain.”
— Hermann von Helmholtz (1862)
Many seem to have forgotten that the foundational discoveries in physics — gravity, light, electricity — were all understood on a small scale in the laboratory long before they led to major technological advancements. These early physicists weren’t aiming to launch rockets, produce lasers, or build electric vehicles; they were driven by pure curiosity. Physics was built on simple, small-scale experiments that eventually revolutionized the world.
Consider Galileo’s inclined plane, where he demonstrated that two copper balls of different weights accelerate equally on an incline. Or Newton’s creation of rainbows in the lab, revealing the true nature of light. These experiments may have seemed trivial at the time, but they laid the groundwork for modern science. Yet, public interest in such experiments was so low that Michael Faraday had to compete with theater and music by holding evening sessions at the Royal Society, where he entertained audiences with his groundbreaking experiments. Faraday’s lectures at the Royal Society showed that science could be as captivating as any performance.
Today, when we present our experimental findings — such as the validity of CAPM, the limitations of dynamic asset pricing theories, or the behavioral responses of humans and primates to uncertainty — we often encounter skepticism. Many question the relevance of our experiments, especially when they deviate from traditional methods or involve non-professionals or smaller financial stakes. We continue to prove that our method — lab experimentation — is not only valid but crucial for everyone.
After nearly 30 years of experimenting with finance, we still face prejudice. Critics argue that finance doesn’t need more data because there’s already plenty from the field, or that our experimental assets lack external validity. Some even suggest that our findings only apply to a special subset of humans or above a certain wealth threshold — claims that are not supported by economic theory. Our work is routinely evaluated by those who lack training in experimental methods.
Yet, despite these challenges, we remain committed to the belief that controlled experiments are the key to unlocking the true nature of economics, just as they have been for natural sciences. Without experiments, all one obtains are “imaginary conjectures.”
For a deeper dive into our experimental approach and findings, please explore Peter Bossaerts’ paper The Value of Experiments in Economics.
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