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Experimental Finance
Experimental finance is a branch of experimental economics, it is the application in financial markets. Experiments in finance are useful as they allow the researchers to isolate and manipulate one variable at the time, thereby illustrating its causal effects without resorting to complex and imperfect econometric techniques to filter out effects.
The main aim of Experimental finance is to study the different market settings and environments to observe experimentally and analyse the agents' behaviour and the resulting features of trading flows, information diffusion and aggregation, price setting mechanism and return processes.Currently, the researchers use simulation software to conduct their research.
This research signifies the evidence by explaining a number of stylised facts associated with the behaviour of financial returns. Experimental economics helps to prove or disprove economic theories and create predictions and insights about real-world behaviour.
The goal of Experimental Finance is twofold. Firstly, experimentation is meant to evaluate the science which is behind finance. Secondly, the goal of experimentation is a deeper understanding of the theory.
A major challenge in experimental finance is to construct experiments that can test the economic models which are true for the model’s assumptions, a key challenge in experimental finance is to construct experiments that can have alternative options available such that the experimental results are not the predictable conclusions.
The experiments and demonstrations are differentiated very carefully by the financial experimentalists and the economist.A true experiment involves the organised manipulation of the specific variables along with the constant variables.
A demonstration only helps to understand the behaviour of the single setting.Due to the lack of an organised manipulation during the demonstration is affected by the assessments results that any of the features of the setting is driving the observed behaviour.
The experiments are more concentrated to such criticisms because the main ingredient in the question does not fluctuate across treatments, and thus does not occur to drive the difference in behaviour across settings. Researchers or Economists should focus more on demonstrations only when the experiments are impractical, which is happens rarely only.
