Chapter 1: Experiments in financial economics: An introduction

Financial economics is a broad branch of study encompassing both the theory and practical applications of the macro- and microeconomic foundations of finance. Financial economics is distinguished from economics generally in that it relates to questions of monetary exchange, in which money today is exchanged for money in the future. A (sometimes asymmetric) lack of information about the future drives uncertainty in such exchanges through time, this in turn necessitating the contractual foundations of financial securities.

Economists interested in intertemporal behavior under uncertainty cannot ignore the role of heterogeneity in human behavior in how financial markets function, nor the interaction of behavior with economic institutions or the environment (in the sense of Smith, 1982). If the predictions of theory are to be falsifiable, they must pass tests at the small scale as well as at the large. This volume presents an abundance of evidence that these factors matter in the laboratory setting. It also illustrates the role that experiments may play in adding to our knowledge of financial decision making and these decisions are mapped to outcomes in different institutions and environments.