Risky Investment Decisions: How Are Individuals Influenced by Their Groups?

51 Pages Posted: 8 Jul 2011

See all articles by W. Kip Viscusi

W. Kip Viscusi

Vanderbilt University - Law School; National Bureau of Economic Research (NBER); Vanderbilt University - Department of Economics; Vanderbilt University - Owen Graduate School of Management; Vanderbilt University - Strategy and Business Economics

Owen R. Phillips

University of Wyoming - College of Business - Department of Economics and Finance

Stephan Kroll

affiliation not provided to SSRN

Date Written: July 5, 2011

Abstract

We investigate the effect of group versus individual decision-making in the context of risky investment decisions in which all subjects are fully informed of the probabilities and payoffs. Although there is full information, the lottery choices pose cognitive challenges so that people may not be sure of their expected utility-maximizing choice. Making such decisions in a group context provides real-time information in which group members can observe others’ choices and revise their own decisions. Our experimental results show that simply observing what others in the group do has a significant impact on behavior. Coupling real-time information with group decisions based on the median value, i.e., majority rule, makes the median investment choice focal, leading people with low values to increase investments and those with high values decrease investments. Group decisions based on the minimum investment amount produce more asymmetric effects.

Keywords: real-time information, group decisions, experiments, herding

JEL Classification: D03, D80, D70

Suggested Citation

Viscusi, W. Kip and Phillips, Owen R. and Kroll, Stephan, Risky Investment Decisions: How Are Individuals Influenced by Their Groups? (July 5, 2011). Vanderbilt Law and Economics Research Paper No. 11-33. Available at SSRN: https://ssrn.com/abstract=1879973 or http://dx.doi.org/10.2139/ssrn.1879973

W. Kip Viscusi (Contact Author)

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States
615-343-7715 (Phone)
615-322-5953 (Fax)

HOME PAGE: http://law.vanderbilt.edu/faculty/viscusi.htm

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vanderbilt University - Department of Economics

Box 1819 Station B
Nashville, TN 37235
United States
(615) 343-7715 (Phone)
(615) 343-5953 (Fax)

HOME PAGE: http://law.vanderbilt.edu/faculty/viscusi.htm

Vanderbilt University - Owen Graduate School of Management

401 21st Avenue South
Nashville, TN 37203
United States
(615) 343-7715 (Phone)
(615) 343-5953 (Fax)

HOME PAGE: http://law.vanderbilt.edu/faculty/viscusi.htm

Vanderbilt University - Strategy and Business Economics ( email )

Nashville, TN 37203
United States

Owen R. Phillips

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States
307-766-2195 (Phone)
307-766-5090 (Fax)

Stephan Kroll

affiliation not provided to SSRN ( email )

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