Are small groups expected utility?

Morone, Andrea and Morone, Piergiuseppe (2012): Are small groups expected utility?

Abstract

In this paper we analyse the empirical performance of several preference functionals using individual and group data. Our investigation aims to address two fundamental questions that have, until now, not been addressed in literature. Specifically, we intend to assess if there exists a risky choice theory that statistically fits group decisions significantly better than alternative theories, and if there are significant differences between individual and group choices. Experimental findings reported in this paper provide answers to both questions showing that when risky choices are undertaken by small groups (dyads in our case), disappointment aversion outperforms several alternative preference functionals, including expected utility. Since expected utility typically emerged as the dominant model in individual risky choices, this finding suggests that differences between individual and group choices exist, showing that the preference aggregation process drives out EU.

• Item Type: MPRA Paper
• Language: English
• Keywords: group decision; expected utility; risk and uncertainty
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D70 - General; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior

References

Allais, M. (1953), “Le Comportement de l'Homme Rationnel devant le Risque, Critique des Postulates et Axiomes de l'Ecole Américaine”, Econometrica 21, 503-546.

Andreoni, J., and Petrie, R., (2008). “Beauty, gender and stereotypes: Evidence from laboratory experiments”, Journal of Economic Psychology, Elsevier, vol. 29(1), pages 73-93.

Bateman, I., and Munro, A. (2005), “An Experiment on Risky Choice Amongst Households”, Economic Journal, Royal Economic Society, vol. 115(502), pages 176-189.

Blinder, A. S., and Morgan, J. (2005) "Are Two Heads Better than One? Monetary Policy by Committee," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 789-811.

Bone, J, (1998), “Risk-sharing CARA individuals are collectively EU”, Economics Letters, Elsevier, vol. 58(3), pages 311-317.

Bone, J., Hey J. D. and Suckling J. (1999), “Are Groups More (or Less) Consistent Than Individuals?”, Journal of Risk and Uncertainty, Springer, vol. 18(1), pages 63-81, April.

Bornstein, G., and Yaniv, I. (1998), "Individual and Group Behavior in the Ultimatum Game: Are Groups More “Rational” Players?" Experimental Economics, Springer, vol. 1(1), pages 101-108.

Bornstein, G., Kugler, T., and Ziegelmeyer, A. (2004). "Individual and Group Decisions in the Centipede Game: Are Groups More “Rational” Players?," Journal of Experimental Social Psychology, Volume 40, Issue 5, September 2004, Pages 599–605

Carbone, E. and Hey J. D. (1994) “Estimation of Expected Utility and Non-Expected Utility Preference Functionals Using Complete Ranking Data”, In B. Munier and M.J. Machina (eds.), Models and Experiments on Risk and Rationality, Kluwer, Boston, 119-39.

Carbone, E. and Hey J. D. (1995) “A Comparison of the Estimates of EU and non-EU Preference Functionals Using Data from Pairwise Choice and Complete Ranking Experiments”, Geneva Papers on Risk and Insurance Theory 20, 111-133.

Cason, T. N. & Mui, V. (1997), "A Laboratory Study of Group Polarisation in the Team Dictator Game", Economic Journal, Royal Economic Society, vol. 107(444), pages 1465-83.

Charness, G., Rigotti L., and Rustichini A. (2007), “Individual Behavior and Group Membership” American Economic Review, American Economic Association, vol. 97(4), pages 1340-1352, September.

Hayne, S. and Cox, J. (2006), “Barking Up the Right Tree: Are Small Groups Rational Agents?”, Experimental Economics, 9:209–222

Cooper, D. J., and Kagel, J. H. (2005), "Are Two Heads Better Than One? Team versus Individual Play in Signaling Games," American Economic Review, American Economic Association, vol. 95(3), pages 477-509, June.

Gul, F. (1991), “A Theory of Disappointment Aversion”, Econometrica 59, 667-686.

Harless, D.W. and Camerer, C.F. (1994), “The Predictive Utility of Generalized Expected Utility Theories”, Econometrica 62, 1251-1289.

Hey, J.D., and Orme, C. (1994), Investigating Generalizations of Expected Utility Theory Using Experimental Data, Econometrica 62, 1291-1326.

Hey, J.D. (2001), "Does Repetition Improve Consistency?," Experimental Economics, Springer, vol. 4(1), pages 5-54.

Hey, J.D., Morone A. Schmidt, U. (2009), “Noise and Bias in Eliciting Preferences”, Journal of Risk and Uncertainty, Springer, vol. 39(3), pages 213-235.

Kocher, M. G., and Sutter, M. (2005), "The Decision Maker Matters: Individual Versus Group Behaviour in Experimental Beauty-Contest Games," Economic Journal, Royal Economic Society, vol. 115(500), pages 200-223, 01.

Kocher, M. G., and Sutter, M. (2007), "Individual versus group behavior and the role of the decision making procedure in gift-exchange experiments," Empirica, Springer, vol. 34(1), pages 63-88.

Masclet, D., Colombier, N., Denant-Boemont, L., and Lohéac, Y. (2009). "Group and individual risk preferences: A lottery-choice experiment with self-employed and salaried workers," Journal of Economic Behavior & Organization, Elsevier, vol. 70(3), pages 470-484.

Morone, A. (2008), “Comparison of Mean-Variance Theory and Expected-Utility Theory through a Laboratory Experiment”, Economics Bulletin, AccessEcon, vol. 3(40), pages 1-7.

Orme, C. (1995), "On the Use of Artificial Regressions in Certain Microeconometric Models," Econometric Theory, Cambridge University Press, vol. 11(02), pages 290-305.

Quiggin, J. (1982), “A Theory of Anticipated Utility”, Journal of Economic Behavior and Organization, 3, 323-343.

Schmidt, U. (2004), “Alternatives to Expected Utility: Some Formal Theories”, in: P.J. Hammond, S. Barberá, and C. Seidl (eds.), Handbook of Utility Theory Vol. II, Kluwer, Boston.

Shupp, R., and Williams A. W. (2008), “Risk preference differentials of small groups and individuals”, Economic Journal, Royal Economic Society, vol. 118(525), pages 258-283, 01.

Starmer, C. (2000), “Developments in Non-Expected Utility Theory : The Hunt for a Descriptive Theory of Choice under Risk”, Journal of Economic Literature 38, 332-382.

Sugden, R. (2004), “Alternatives to Expected Utility: Foundations”, in: P.J. Hammond, S. Barberá, and C. Seidl (eds.), Handbook of Utility Theory Vol. II, Kluwer, Boston.

Sutter, M. (2005), "Are four heads better than two? An experimental beauty-contest game with teams of different size," Economics Letters, Elsevier, vol. 88(1), pages 41-46, July.

Sutter, M. (2009), “Individual Behavior and Group Membership: Comment”, American Economic Review, American Economic Association, vol. 99(5), pages 2247-57.

Sutter, M., Kocher, M. G., and Strauss, S. (2009), "Individuals and teams in auctions," Oxford Economic Papers, Oxford University Press, vol. 61(2), pages 380-394, April.

von Neumann, J. and Morgenstern, O. (1944), Theory of Games and Economic Behavior, Princeton University Press, Princeton.