Are individuals more risk and ambiguity averse in a group environment or alone? Results from an experimental study

Most decision-making research in economics focuses on individual decisions. Yet, we know, from psychological research in particular, that individual preferences can be sensitive to social pressures. In this paper, we study the impact of a group environment on individual preferences for risky (i.e., known probabilities) and ambiguous (i.e., unknown probabilities) prospects. In our experiment, each participant was invited to make a series of lottery-choice decisions in two different conditions. In the Alone condition, individuals made private choices, whereas in the Group condition, individuals belonged to a three-person group and group members' choices were aggregated according to either a majority or unanimity rule. This design allows us to study the impact of a group environment on individuals' attitude towards both risky and ambiguous prospects, while controlling for the decision rule used in the group. Our experimental results show that when individuals are in the Group condition, they tend to be less risk averse and more ambiguity averse than when they are not part of a group (Alone condition). Our experiment also suggests that the decision rule matters as it shows that these two trends tend to be stronger when the group implements a unanimity rule. Specifically, we found that individuals who belong to a group implementing a unanimity rule are significantly less risk averse than individuals who belong to a group that relies on the majority rule. We obtained a similar-but non-significant-result under ambiguity

Can groups solve the problem of over-bidding in contests?

This study reports an experiment that examines whether groups can better comply with theoretical predictions than individuals in contests. Our experiment replicates previous findings that individual players significantly overbid relative to theoretical predictions, incurring substantial losses. There is high variance in individual bids and strong heterogeneity across individual players. The new findings of our experiment are that groups make 25% lower bids, their bids have lower variance, and group bids are less heterogeneous than individual bids. Therefore, groups receive significantly higher and more homogeneous payoffs than individuals. We elicit individual and group preferences towards risk using simple lotteries. The results indicate that groups make less risky decisions, which is a possible explanation for lower bids in contests. Most importantly, we find that groups learn to make lower bids from communication and negotiation between group members