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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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  • 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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Suggested Citation

  • Gary Charness & Edi Karni & Dan Levin, 2007. "Individual and group decision making under risk: An experimental study of Bayesian updating and violations of first-order stochastic dominance," Journal of Risk and Uncertainty, Springer, vol. 35(2), pages 129-148, October.
  • Handle: RePEc:kap:jrisku:v:35:y:2007:i:2:p:129-148
    DOI: 10.1007/s11166-007-9020-y
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    1. Ananda Ganguly & John Kagel & Donald Moser, 2000. "Do Asset Market Prices Reflect Traders' Judgment Biases?," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 219-245, May.
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    4. 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, January.
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    More about this item

    Keywords

    Decision making under risk; Group decisions; Bayesian updating; First-order stochastic dominance; D80; C91; C92;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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