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Two heads are less bubbly than one: Team decision-making in an experimental asset market

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  • Cheung, Stephen L.
  • Palan, Stefan

Abstract

In the world of mutual funds management, responsibility for investment decisions is increasingly entrusted to small teams instead of individuals. Yet the effect of team decision-making in a market environment has never been studied in a controlled experiment. In this paper, we investigate the effect of team decision-making in an asset market experiment that has long been known to reliably generate price bubbles and crashes in markets populated by individuals. We find that this tendency is substantially reduced when each decision-making unit is instead a team of two. This holds across a broad spectrum of measures of the severity of mispricing, both under a continuous double-auction institution and in a call market. The result is not driven by reduced turnover due to time required for deliberation by teams, and continues to hold even when subjects are experienced. Our result also holds not only when our teams treatments are compared to the ‘narrow' baseline provided by the corresponding individuals treatments, but also when compared more broadly to the results of the large body of previous research on markets of this kind.

Suggested Citation

  • Cheung, Stephen L. & Palan, Stefan, 2011. "Two heads are less bubbly than one: Team decision-making in an experimental asset market," Working Papers 2011-08, University of Sydney, School of Economics.
  • Handle: RePEc:syd:wpaper:2123/7778
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    Cited by:

    1. Haoran He & Marie Claire Villeval, 2014. "Are teams less inequality averse than individuals?," Post-Print halshs-01077253, HAL.
    2. repec:eee:eecrev:v:100:y:2017:i:c:p:72-94 is not listed on IDEAS
    3. Rau, Holger A., 2015. "The disposition effect in team investment decisions: Experimental evidence," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 272-282.
    4. Cheung, Stephen L. & Hedegaard, Morten & Palan, Stefan, 2014. "To see is to believe: Common expectations in experimental asset markets," European Economic Review, Elsevier, vol. 66(C), pages 84-96.
    5. Stéphane Robin & Katerina Straznicka & Marie Claire Villeval, 2012. "Bubbles and Incentives : An Experiment on Asset Markets," Working Papers 1235, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    6. Praveen Kujal & Owen Powell, 2017. "Bubbles in Experimental Asset Markets," Working Papers 17-01, Chapman University, Economic Science Institute.
    7. John Griffin, 2015. "Risk Premia and Knightian Uncertainty in an Experimental Market Featuring a Long-Lived Asset," Fordham Economics Discussion Paper Series dp2015-01, Fordham University, Department of Economics.
    8. John Griffin, 2015. "Risk Premia and Knightian Uncertainty in an Experimental Market Featuring a Long-Lived Asset," Fordham Economics Discussion Paper Series dp2015-01er:dp2015-01, Fordham University, Department of Economics.
    9. Füllbrunn, Sascha & Rau, Holger A. & Weitzel, Utz, 2014. "Does ambiguity aversion survive in experimental asset markets?," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 810-826.
    10. Füllbrunn, Sascha & Rau, Holger & Weitzel, Utz, 2013. "Do ambiguity effects survive in experimental asset markets?," MPRA Paper 44700, University Library of Munich, Germany.
    11. Kugler, Tamar & Kausel, E.E. & Kocher, Martin G., 2012. "Are groups more rational than individuals? A review of interactive decision making in groups," Munich Reprints in Economics 18215, University of Munich, Department of Economics.
    12. Giovanni Giusti & Janet Hua Jiang & Yiping Xu, 2014. "Interest on Cash, Fundamental Value Process and Bubble Formation on Experimental Asset Markets," Staff Working Papers 14-18, Bank of Canada.
    13. Butler, David & Cheung, Stephen L., 2018. "Mind, Body, Bubble! Psychological and Biophysical Dimensions of Behavior in Experimental Asset Markets," IZA Discussion Papers 11563, Institute for the Study of Labor (IZA).
    14. Baethge, Caroline, 2016. "Performance in the beauty contest: How strategic discussion enhances team reasoning," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-17-16, University of Passau, Faculty of Business and Economics.
    15. He, Haoran & Villeval, Marie Claire, 2017. "Are group members less inequality averse than individual decision makers?," Journal of Economic Behavior & Organization, Elsevier, vol. 138(C), pages 111-124.
    16. Matthias Weber & John Duffy & Arthur Schram, 2018. "An Experimental Study of Bond Market Pricing," Journal of Finance, American Finance Association, vol. 73(4), pages 1857-1892, August.
    17. Jingjing Zhang, 2012. "Communication in asymmetric group competition over public goods," ECON - Working Papers 069, Department of Economics - University of Zurich.
    18. Rau, Holger A., 2015. "The disposition effect in team investment decisions: Experimental evidence," Center for European, Governance and Economic Development Research Discussion Papers 256, University of Goettingen, Department of Economics.
    19. Haoran He & Marie Claire Villeval, 2014. "Are team members less inequality averse than individual decision makers?," Working Papers halshs-00996545, HAL.
    20. Owen Powell & Natalia Shestakova, 2017. "The robustness of mispricing results in experimental asset markets," Vienna Economics Papers 1702, University of Vienna, Department of Economics.
    21. Stefan Palan, 2014. "A Software for Asset Market Experiments," Working Paper Series, Social and Economic Sciences 2014-01, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    22. Stefan Palan, 2013. "A Review of Research into Smith, Suchanek and Williams Markets," Working Paper Series, Social and Economic Sciences 2013-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.

    More about this item

    Keywords

    group decision-making; price bubbles; asset market experiments;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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