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Individual and group decision making under risk: An experimental study of Bayesian updating and violations of first-order stochastic dominance

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Author Info

  • Gary Charness
  • Edi Karni

    ()

  • Dan Levin

Abstract

This paper reports the results of experiments designed to test whether individuals and groups abide by monotonicity with respect to first-order stochastic dominance and Bayesian updating, when making decisions under risk. The results indicate a significant number of violations of both principles. The violation rate when groups make decisions is substantially lower, and decreasing with group size, suggesting that social interaction improves the decision-making process. Greater transparency of the decvision task reduce the violation rate, suggesting that these violations are due to judgment errors rather than the preference structure. In one treatment, however, less complex decisions result in higher error rate.

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File URL: http://hdl.handle.net/10.1007/s11166-007-9020-y
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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 35 (2007)
Issue (Month): 2 (October)
Pages: 129-148

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Handle: RePEc:kap:jrisku:v:35:y:2007:i:2:p:129-148

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Web page: http://www.springerlink.com/link.asp?id=100299

Related research

Keywords: Decision making under risk; Group decisions; Bayesian updating; First-order stochastic dominance; D80; C91; C92;

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  1. Martin G. Kocher & Matthias Sutter, 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.
  2. Zizzo, Daniel John & Stolarz-Fantino, Stephanie & Wen, Julie & Fantino, Edmund, 2000. "A violation of the monotonicity axiom: experimental evidence on the conjunction fallacy," Journal of Economic Behavior & Organization, Elsevier, vol. 41(3), pages 263-276, March.
  3. Ganguly, Ananda R & Kagel, John H & Moser, Donald V, 2000. " Do Asset Market Prices Reflect Traders' Judgment Biases?," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 219-45, May.
  4. Grether, David M., 1992. "Testing bayes rule and the representativeness heuristic: Some experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 31-57, January.
  5. Grether, David M., . "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," Working Papers 245, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Ouwersloot, Hans & Nijkamp, Peter & Rietveld, Piet, 1998. "Errors in probability updating behaviour : Measurement and impact analysis," Journal of Economic Psychology, Elsevier, vol. 19(5), pages 535-563, October.
  7. Gary Charness & Dan Levin, 2005. "When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect," American Economic Review, American Economic Association, vol. 95(4), pages 1300-1309, September.
  8. David J. Cooper & John H. Kagel, 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.
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