Anonymous (reviewer)
Experimentation in finance is both rare and novel, so some justification is in order. The goal of experimentation is twofold.
First, experimentation is meant to evaluate the science behind finance. Indeed, complete scientific validation at some point does require experimentation, otherwise, to quote the late Hannes Alfven (Nobel prize physics), we are "likely to go completely astray into imaginary conjecture.”
It is interesting to note that Alfven was an astrophysicist, and astrophysicists, like finance scholars, get most of their data from the field. But unlike the latter, astrophysicists do insist on verifying the principles behind their attempts to interpret field data using laboratory experiments, even if the latter are only miniscule compared to real-world (or should I say real-universe?) phenomena. Like astrophysicists, finance scholars interpret field data through the lens of particular theory (e.g., competitive equilibrium), without being able to verify independently that this lens is appropriate. Only laboratory experiments can give us the confidence that our inference is correct.
Effectively, good experiments require the same as good theory: one needs to isolate a phenomenon, abstracting from complicating and confounding factors. As such, good theory (e.g., in finance: the Lucas model) and good experiments (see my experiments on the Lucas model) may often come over as "irrealistic." That is perfectly all right, because realism is not the goal per se.
The second goal of experimentation is to come to a deeper understanding of the theory. My own experience with experiments confirms that one cannot appreciate all the ramifications (and the beauty) of the theory without thinking through how one could generate it in the laboratory. To paraphrase the late Richard Feynman (another Nobel prize in physics): "One cannot understand theory if one cannot create it.”
Indeed, our own attempts to “create” the Lucas equilibrium in the laboratory led us to realize that some claims in the literature about it were misguided. While others evidently did not need experiments to realize the same, in our experience, few students of finance appreciate the true nature of the theory. For instance, equivalence results like the claim that static, complete-markets allocations can be implemented in incomplete markets by allowing re-trading, are really not “equivalent,” because vastly different notions of competitive equilibrium are being compared.
Bossaerts wrote an opinion piece on experimental finance, published in Foundations and Trends in Financial Economics (here is a link). The above is taken from it. The piece could serve as a survey for those who are interested in past accomplishments. It focuses on asset pricing theory.
Those interested in finance experiments with a foundation in neuroscience should look at the relevant link above.
Picture of the TORPEX at EPFL (Ecole Polytechnique Fédérale Lausanne), a tiny vacuum-like space where physicists generate "plasma" using a microwave "oven" (to the right) in order study physical processes inside "heavenly" bodies (stars) that float in a real vacuum. It's small relative to the real stars, but hey, you have to start somewhere...
(Yes, our experimental markets are also small. We do wish we had the same budget to study financial markets, though!)