Academic journal article Economic Inquiry

How Groups Reach Agreement in Risky Choices: An Experiment

Academic journal article Economic Inquiry

How Groups Reach Agreement in Risky Choices: An Experiment

Article excerpt

I. INTRODUCTION

Although economists model decision makers as isolated individuals, within firms and organizations decisions are often taken through deliberations in groups and committees. Many of those decisions involve options with different degrees of risk. In the last decade economists have produced a growing number of studies on this issue.

In an experiment, we study decision-making procedures of individuals versus groups in a series of choices between a safe and a risky option. How do groups aggregate individual preferences when members are initially in disagreement? In the laboratory, one can design a clean set up, which is free from external confounding factors, in order to better answer this question. Eliciting risk attitudes for groups was initiated in management and social psychology (Lamm and Myers 1978; Pruitt 1971; Stoner 1961) and recently involved also economists (Baker et al. 2008; Masclet et al. 2009). When a group decides whether to enter a lottery or not, there is no obvious correct choice and individuals may legitimately differ in their proposals due to their preferences. For this reason, the psychological literature on groups and teams would classify this task as "judgmental." On the contrary, "intellective" tasks have a demonstrably correct solution. For instance, Cooper and Kagel (2005) study a strategic market entry task, which is mostly intellective. The only intellective aspect of our lottery task is that choices should be coherent. (1) Earlier studies in social psychology introduced the concepts of risky shifts and cautious shifts. "Risky shift" denotes situations where groups make riskier decisions than individuals, and "cautious shift" otherwise.

Depending on the study, the results reported in the literature are sometimes in one direction and sometimes in the other. One reason for this diversity of findings may be the presence of important, but overlooked, differences in the design and methodology among studies. Hence, we first proceed by mapping the approach of some recent experimental studies. In the present work, we designed group interaction rules to facilitate information exchange, to encourage participation by all members, and to focus the interaction on how to aggregate individual preferences. The main aim is to understand in detail how groups of three members deal with disagreement. Our design is novel because there is a written record of the communication among group members to understand internal dynamics and to correlate with actual differences in outcomes. It is the first, among the studies of group risk attitude, where before the discussion, each participant must post her proposal, a feature that saves discussion time and prevents shy members from being silenced. This piece of information allows us to perform an individual-level analysis of preference aggregation. Moreover, in case of disagreement, the minority has veto power over the group decision. Like many other studies, we call for a unanimous decision but, unlike others, here the sanction for disagreement is severe: no choice and zero earnings. In the field this rule is observed in international bodies that do not take a stand on an issue when they do not reach consensus, or in organizations that do not participate in an auction unless the board of directors agree on a bid. This rule creates a common interest within the group to communicate and reach a decision. Other default rules do not generate this positive group dynamic.

Through the group process, we find that lottery choices become more coherent and closer to risk neutrality. In resolving disagreement, the proposal of the majority did not always prevail. It prevailed more often when its proposal was closer to risk neutrality. There are some interesting personality and demographic effects, which we report in detail below.

The remainder of the paper is organized as follows. Section II reviews literature. Section III describes experimental design and procedures. …

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