Teams Take the Better Risks

Abstract

Many important economic and political decisions are made by teams. In the economic literature, however, the decision units are frequently modeled as individual economic agents. The paper experimentally investigates the question to what extent observed team decisions under risk are actually consistent with the principles of rational choice, specifically the principles of Expected Utility Theory (EUT) and of Portfolio Selection Theory (PST). The experiment is performed with individuals and teams. We find almost no evidence for the greater compliance of team decisions than of individual decisions with the principles of EUT. However, there is substantial evidence for the consistency of team decisions with the PST. Compared to individuals, teams accumulate significantly more expected value at a significantly lower total risk (measured in SD). We introduce a team decision algorithm, excess-risk vetoing, that combines simple majority voting with the right to veto alternatives providing additional risk that is not compensated by additional expected value. We find that the results of our experiment are well explained by the excess-risk vetoing.

JEL Classification: C91, C92, D81, D70, M10