Individual and Group Decision Making Under Risk: An Experimental Study of Bayesian Updating and Violations of First-Order Stochastic Dominance

Abstract

In this paper, we report the results of experiments designed to test whether individuals and groups abide by the axioms of monotonicity, with respect to first-order stochastic dominance and Bayesian updating, when making decisions in the face of 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, than when solitary individuals make decisions, suggesting that social interaction or consultation improves the decision making process. Greater transparency for the decision task tends to reduce the violation rate, suggesting that these violations are due to errors of judgment rather than reflecting the structure of the preference relations. However, we do find some cases where the less difficult decision leads to a higher rate of decision error, both for individuals and groups; we argue that this is consistent with the representativeness bias.

Keywords: First-order stochastic dominance, group decision-making, complexity, representativeness bias

JEL Classification: B49, C91, C92, D81