Combining a Theoretical Prediction with Experimental Evidence

33 Pages Posted: 26 Mar 2008

See all articles by Ido Erev

Ido Erev

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management

Alvin E. Roth

Dept. of Economics, Stanford University; National Bureau of Economic Research (NBER)

Robert Slonim

Case Western Reserve University - Department of Economics

Greg Barron

Technion-Israel Institute of Technology

Date Written: July 12, 2002

Abstract

We propose a novel experimental design to assess how to combine predictions from a theoretical model with experimental evidence to yield new, more accurate quantitative predictions. The first step involves deriving the predictions of the theoretical model by estimating unobserved parameters. The second step involves estimating the optimal weights with which to combine the theoretical predictions with experimental evidence. This latter estimation uses a random sample of experimental tasks from the relevant space. The optimal weight to give to the theoretical prediction can be summarized by a single number - the Equivalent Number of Observations (ENO). This number has an intuitive interpretation: the prediction of the theory is as accurate as the prediction from an experiment with n = ENO observations of the task to be predicted. To demonstrate and evaluate the use of the equivalent number of observations, the paper examines popular models in two of the best-studied problems in experimental economics: individual decision-making under uncertainty and repeated play of constant sum games. The two examples show that in addition to solving applied problems, the results provide some insights concerning the interpretation of descriptive models as useful approximations.

Suggested Citation

Erev, Ido and Roth, Alvin E. and Slonim, Robert and Barron, Greg, Combining a Theoretical Prediction with Experimental Evidence (July 12, 2002). Available at SSRN: https://ssrn.com/abstract=1111712 or http://dx.doi.org/10.2139/ssrn.1111712

Ido Erev

Technion-Israel Institute of Technology - William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel

Alvin E. Roth

Dept. of Economics, Stanford University ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert Slonim

Case Western Reserve University - Department of Economics ( email )

Cleveland, OH 44106
United States

Greg Barron (Contact Author)

Technion-Israel Institute of Technology ( email )

Technion City
Haifa 32000, Haifa 32000
Israel

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