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For example, in order to recreate a oneshot exchange between a manager and a worker over a budget in a lab setting, Schwartz and his colleagues found a way to give participants enough experience to “get” the idea of the experiment, but not skew results by having them get too comfortable with each other. Participants interacted for 20 rounds, but were randomly re-matched after each round.

That same attention to detail was maintained when it came to money.

summary from Steven Schwartz

As the budget communication manipulation played out, the subordinate either proposed an allocation of the project’s profit to the superior — they tagged this the “no factual assertion” treatment — or reported the project’s exact cost to the superior — the “factual assertion” treatment.

Schwartz and his colleagues discovered that the most honesty came from giving subordinates final say over the budget. That is, when employees are trusted to do the right thing, they tend to do it.

This is not to say that employees should be trusted entirely. Schwartz’s results also suggest that while having the superior set the budget may be resented by employees, it does benefit the firm through greater control.

Taken together, this research shows that companies must be careful in choosing just the right amount of authority for their managers. Give them too much and employees will act with resentment; too little, and they will run roughshod over corporate policies.

It’s in this way that experimental economics can trump traditional economic models: It is better at capturing human behavior that isn’t always rational.

And accounting, like human nature, is a natural application for the methods of experimental economics, said Shyam Sunder, a professor at the Yale School of Management and a noted experimental economist. As a largely institutional discipline, even small changes to accounting can have large consequences.

“Of course no experience in the laboratory will give you a perfect prediction. That doesn’t happen even in science, but it gives you some idea, on a small scale, what might happen if you made this change, and that gives you a little more confidence on which path to choose,”

Sunder said. Sunder recently attended a conference where a group of researchers wanted to know whether auditors choosing their own standards or norms would lead to an increase in compliance.

“They found, yes, it makes a significant difference,” he said. “If you have a chance to participate in deciding the norms and standards, you stick to them more, even if, in auditing context, it means personal sacrifice.”

Schwartz was attracted to experimental economics for its hands-on approach and its respect for the enduringly popular game theory, or how people react strategically in situations where competing strategies are at work. Schwartz describes it all simply as “fun.”

That sense of fun has translated into all sorts of creative approaches, from finding a way to measure cooperation mathematically to pondering eBay’s feedback mechanism. Schwartz has also discovered that he shares a passion for the motivations of honesty and altruism with top names in the field such as Ernst Fehr of the University of Zurich in Switzerland, who recently published a provocative paper on the roots of sharing by testing children and candy.

Schwartz also shares an interest in showing how economics can turn conventional wisdom on its head. He recalled a famous experiment, some 20 years ago, in which researchers found that if lying would net you only a paltry sum as a reward, you wouldn’t do it.

“You are not going to lie for a nickel,” he explained.

But boost that reward to a quarter and all of a sudden fibbing emerges — or so the experiments said.

“But we found that’s not really the case,” he said. He has seen firsthand how subjects forgo all types of selfish behavior in favor of more benevolent social norms.

So we’re not just servants of our own self-interest?

Not at all.

“People,” he said, “are much more willing to return a kindness with a kindness than you think.”

Kathleen Ryan O’Connor

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