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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 (University of California, Santa Barbara)
Edi Karni (Johns Hopkins University)

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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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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number 20-07.

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Date of creation: 01 Oct 2007
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Handle: RePEc:cdl:ucsbec:20-07

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Related research
Keywords: Decision making under risk; group decisions; Bayesian updating; first-order stochastic dominance.;

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References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
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  4. Martin G. Kocher & Matthias Sutter, 2004. "The Decision Maker Matters: Individual versus Group Behaviour in Experimental Beauty-Contest Games," Papers on Strategic Interaction 2004-09, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
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  5. Alan S. Blinder & John Morgan, 2001. "Are Two Heads Better Than One?: An Experimental Analysis of Group vs. Individual Decisionmaking," Working Papers 130, Princeton University, Department of Economics, Center for Economic Policy Studies.. [Downloadable!]
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  6. 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. [Downloadable!]
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  1. Marcela Ibanez & Simon Czermak & Matthias Sutter, . "Searching for a better deal – On the influence of group decision making, time pressure and gender in a search experiment," Working Papers 2008-05, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
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  2. Francesco Feri & Bernd Irlenbusch & Matthias Sutter, 2008. "Efficiency Gains from Team-Based Coordination – Large-Scale Experimental Evidence," Working Papers 2008-22, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
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  3. Weber, Richard & Graevenitz, Georg von & Harhoff, Dietmar, 2009. "The Effects of Entrepreneurship Education," Discussion Papers in Business Administration 10966, University of Munich, Munich School of Management. [Downloadable!]
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    • Richard Weber & Georg von Graevenitz & Dietmar Harhoff, 2009. "The Effects of Entrepreneurship Education," Discussion Papers 269, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  4. Jingjing Zhang & Marco Casari, 2009. "How groups reach agreement in risky choices: an experiment," Department of Economics Working Papers 2009-08, McMaster University. [Downloadable!]
    Other versions:
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