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Social Interaction Effects and Choice Under Uncertainty. An Experimental Study

Author

Listed:
  • Cooper, David

    () (Florida State University)

  • Rege, Mari

    () (University of Stavanger)

Abstract

Extensive field evidence shows individuals’ decisions in settings involving choice under uncertainty (e.g. savings and investment choices) depend on the decisions of their peers. One hypothesized cause of peer group effects is social interaction effects: an individual’s utility from an action is enhanced by others taking the same action. We employ a series of controlled laboratory experiments to study the causes of peer effects in choice under uncertainty. We find strong peer group effects in the laboratory. Allowing feedback about others’ choices increases group polarization and reduces the likelihood that subjects will choose risky or ambiguous gambles. We observe spillover effects, as observing another’s choice of one risky (safe) gamble makes all risky (safe) gambles more likely to be chosen. Our design allows us to eliminate social learning, social norms, group affiliation, and complementarities as possible causes for the observed peer group effects, leaving social interaction effects as the likely cause. We use a combination of theory and empirical analysis to show that preferences including “social regret” are more consistent with the data than preferences including a taste for conformity.

Suggested Citation

  • Cooper, David & Rege, Mari, 2008. "Social Interaction Effects and Choice Under Uncertainty. An Experimental Study," UiS Working Papers in Economics and Finance 2009/24, University of Stavanger.
  • Handle: RePEc:hhs:stavef:2009_024
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    File URL: http://www1.uis.no/ansatt/odegaard/uis_wps_econ_fin/uis_wps_2009_24_cooper_rege.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fabio Tufano, 2010. "Are ‘true’ preferences revealed in repeated markets? An experimental demonstration of context-dependent valuations," Experimental Economics, Springer;Economic Science Association, vol. 13(1), pages 1-13, March.
    2. Armin Falk & Urs Fischbacher & Simon Gaechter, 2009. "Living in Two Neighborhoods – Social Interaction Effects in the Lab," Discussion Papers 2009-01, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    3. Andrej Angelowski & Daniela Di Cagno & Werner Güth & Francesca Marazzi & Luca Panaccione, 2016. "Do All "Bad Apples" Taste the Same? Experimental Analysis of Heterogeneity in Local Public Good Provision," Working Papers CESARE 4/2016, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    4. David Zetland & Marina Della Giusta, 2011. "Focal Points, Gender Norms and Reciprocation in Public Good Games," Economics & Management Discussion Papers em-dp2011-01, Henley Business School, Reading University.

    More about this item

    Keywords

    experimental economics; social interaction effects; risk; uncertainty;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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