Group decision rules and group rationality under risk

J Risk Uncertain (2016) 52:99–116 DOI 10.1007/s11166-016-9237-8 Group decision rules and group rationality under risk Aurélien Baillon 1 & Han Bleichrodt 1 & Ning Liu 1 & Peter P. Wakker 1 Published online: 15 June 2016 # The Author(s) 2016. This article is published with open access at Springerlink.com Abstract This paper investigates the rationality of group decisions versus individual decisions under risk. We study two group decision rules, majority and unanimity, in stochastic dominance and Allais paradox tasks. We distinguish communication effects (the effects of group discussions and interactions) from aggregation effects (mere impact of the voting procedure), which makes it possible to better understand the complex dynamics of group decision making. In an experiment, both effects occurred for intellective tasks whereas there were only aggregation effects in judgmental tasks. Communication effects always led to more rational choices; aggregation effects did so sometimes but not always. Groups violated stochastic dominance less often than individuals did, which was due to both aggregation and communication effects. In the Allais paradox tasks, there were almost no communication effects, and aggregation effects made groups deviate more from expected utility than individuals. Keywords Group decisions under risk . Unanimity rule . Majority rule . Allais paradox JEL Classification D81 . C91 Many economic decisions—e.g. family financial planning, corporate strategies, national laws—are made by groups. The literature comparing individual and group decision making is rich (Kugler et al. 2012). Groups have been found to attenuate, amplify, or replicate the biases found for individual decisions (Kerr et al. 1996), and these diverse findings highlight the closing remark of a recent review paper: BUltimately, the goal of Electronic supplementary material The online version of this article (doi:10.1007/s11166-016-9237-8) contains supplementary material, which is available to authorized users. * Peter P. Wakker 1 Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam, The Netherlands 100 J Risk Uncertain (2016) 52:99–116 comparing individual and group decision making is to identify the contexts and types of decisions where each is likely to work best^ (Charness and Sutter 2012, p. 174). This paper compares group and individual decision making for three tasks: a test of non-transparent stochastic dominance, the Allais common consequence paradox, and the Allais common ratio paradox. Stochastic dominance is an objective, generally accepted criterion of rationality but recognizing it may require intellectual effort. We will therefore refer to this type of task as intellective. Previous research has shown that groups violate stochastic dominance less frequently than individuals (Charness et al. 2007), suggesting that group decisions improve rationality. Expected utility (EU) violations are to a large extent due to motivational or subjective aspects of human behavior. We will, therefore, call the Allais tasks judgmental. In this, we follow the psychological literature on group decisions (e.g. Laughlin and Ellis 1986; Kerr and Tindale 2011), where problems with a demonstrably correct answer are called intellective and tasks in which one cannot objectively defend one’s preferred alternative as correct (e.g. aesthetic judgments or matters of personal taste) are called judgmental. In Allais’ common consequence and common ratio paradoxes (Allais 1953), previous research has found that groups violate EU as often as individuals do (Rockenbach et al. 2007; Bone et al. 1999; Bateman and Munro 2005). We distinguish two components in group decision making: aggregation and communication. Aggregation refers to the direct effect of the procedure on the group decision, without involving any change of an individual or any communication. In single choice tasks, aggregation effects tend to amplify the patterns exhibited by the majority, as we will show; these effects are merely procedural and statistical. For tasks involving two choices (as in the Allais paradoxes), however, aggregation effects can reverse the majority pattern. It then is, for example, possible that, while a majority of the group members behave according to EU, the group decision violates EU. Aggregation effects are fleeting and do not influence individual attitudes or subsequent individual decisions. Communication effects do influence individuals. Communication effects are lasting and capture the effects of group decision making beyond pure aggregation. These effects include the impact of learning what others prefer and why they prefer it. For instance, group decision making can foster discussion and this may change members’ preferences. Communication effects will persist after the group process has ended (Maciejovsky et al. 2013). In our experiment, we measured the strength of aggregation and communication effects for majority and unanimity group decisions. We elicited individual preferences before and after the group decision stage. Changes in individual preferences were interpreted as communication effects. We also used a second approach to measure communication effects. To control for the effect of aggregation, we aggregated the individual decisions before the group decision stage into simulated group decisions. Differences between these simulated decisions and the actual group decisions constitute communication effects. For instance, in the actual group decisions a minority sometimes convinced a majority to change their preferences, which was clearly a communication effect. The effects of decision rules are central in political economics (Feddersen and Pesendorfer 1998; Messner and Polborn 2004), and have also been studied in psychology (Kerr and Tindale 2004). However, they have rarely been considered for decisions J Risk Uncertain (2016) 52:99–116 101 under risk. An exception is Brunette et al. (2015), who implemented majority and unanimity voting rules, but did not permit verbal communication between group members. Most existing studies considered groups of two individuals, for which majority and unanimity rules make the same predictions and therefore cannot be distinguished. We used groups of three individuals, for which these rules can be distinguished. In intellective tasks, the results indicated that both rules led to aggregation and communication effects, which improved both group rationality and individual rationality. In the judgmental tasks there were mainly aggregation effects, which led to more deviations from expected utility for groups than for individuals in one of the tasks (the common ratio task). 1 Literature According to social-decision scheme theory (Davis 1973), group decisions are determined by the majority view unless the minority view is demonstrably correct, which is the case where Btruth wins^ (Laughlin and Ellis 1986; Davis 1992; Kerr and Tindale 2011). This suggests t (...truncated)