By his own reckoning, economics professor Andrew Schotter has spent virtually his entire academic life at NYU. Since graduating from Cornell in 1969 and arriving at NYU as a graduate student, he has played a number of key roles, including eight years total – in two separate stretches – as chairman of the Economics Department and co-director of the C.V. Starr Center for Applied Economics, a research branch of the Economics Department. He also speaks with great enthusiasm about his current role as director of the Center for Experimental Social Science, an interdisciplinary experimental research center at NYU, started just a year and a half ago, which combines the study of psychology, economics, and political science.

The work done at the Center for Experimental Social Science, explains Dr. Schotter, reflects a sea change that has taken place in the field of economics over the last 25 years, an effort to broaden the behavioral assumptions that economists have historically relied on to make forecasts. “Typically,” he says, “economists assume that everyone is perfectly rational, capable of making all the calculations that they need to make, and that they care only about themselves.” Indeed, the purpose of the Center is to test the validity of such behavioral assumptions.

The controlled economic environment established at the Center’s experimental economics laboratory allows for such testing, and results have led researchers to the conclusion that traditional economic theories many times fail to predict human behavior accurately. “The reason,” explains Schotter, “is that human behavior is far more complicated than economists have believed.” It is not only self interest that motivates people, there are other variables: fairness, biases, and the way people make calculations that have not been factored into traditional economic theories and therefore limit their predictive value.

Experimental Economics– based on the premise that theories can be tested in a controlled environment and that economists’ assumptions can be expanded – is “the hot thing” these days, according to Schotter. “The goal is not to abandon economic theory, but to create a more realistic baseline from which you would explore behavior and then make modifications when necessary.” His work with other researchers at the Center allows not only for the testing of traditional theories but also for designing economic institutions. An example of where the latter purpose could be useful, he says, might be the recent Federal Communications Commission auction of spectrum rights. Such rights are needed by cell phone companies in order to provide service. But what should the auction look like? What should the rules be? How could the government maximize revenues?

That is something that really can be taken to the lab,” says Schotter. “You can write down a set of rules for how to sell these goods and create a kind of fictitious world that replicates what this auction might look like and test it. The laboratory provides a kind of cheap and quick pre-test for economic institutions. It is cheaper to find the bugs in the lab rather than in the real world where you may find you have a disaster on your hands.”

A particular interest of Schotter, which he has been testing in the Center’s laboratory, is the role of advice in decision making and game playing. “If you think about the straw man version of economic theory, there really is no role for advice because everyone is perfectly informed, perfectly rational, and has all the information needed,” explains Schotter. “There would be no reason to ask anybody else for advice before you make a decision because they could not know any more than you. But if you look at the real world you see that we all ask advice before we do anything, right? Before we buy a car or get a mortgage. More importantly, the people we ask for advice are rarely experts, usually just friends and family.”

Contrary to the rational assumptions of traditional economic theory, people take this “naïve,” inexpert advice when there is no reason they should, and surprisingly, exhibit behavior in games much more in accord with the predictions of economic theory than those who have not had access to this advice. So an important impact is that advice seems to make people look more rational, which is kind of odd because the people giving advice certainly are not experts. Advice, Schotter has concluded from his game-theoretical research, turns out to be efficiency increasing.

A possible explanation is that whether good or bad, advice makes you think of the problem a second or third time. “In other words, if I were to give you what would clearly be ridiculous advice, you would have to think through why it was ridiculous, and in the process, you might develop an insight into the problem that you would not have had if I did not give you my stupid advice in the first place.”

Schotter and his colleagues at the Center for Experimental Social Science have tested the role of advice in developing conventions of behavior, an area that has always intrigued him. “I was interested in why we have certain conventions in economics. Conventions of how fast you should work, conventions like tipping behavior. Why is it fifteen percent? So we did a series of experiments that lasted for 80 generations where people played a game and were able to give advice to the people who played after them. The idea was that they could create conventions of behavior in their lifetime about how to engage in this particular situation. And then they could pass them on from generation to generation. We watched over time how people agreed this game should be played and told their "laboratory children" how to behave while playing it.”

A real world example of this sort of game, says Schotter, might be when a retiring CEO gives the incoming CEO the inside story on the corporation – what sorts of behavior are allowed or not allowed, how to interpret what opponents are doing. Important conventions or accumulated wisdom gets passed on in this informal way, and it is critical to understand the mechanism.

With the help of research such as Schotter’s, economics has made its way out of the ivory tower and into the real world, where it is proving itself ever more relevant and useful.