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

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.