Monday, May 14, 2012

How group utility differs from individual utility

Expected utility lies at the core of almost all analyses in Economics that feature uncertainty. While one can always come up with exceptions to the rule, expected utility is by and large accepted as a good characterization of the behavior under uncertainty of individuals. The emphasis is here on individuals, and one can wonder whether the behavior could be different when they act as a group. Group dynamics are complex, and there are plenty of examples where individuals behave differently in a group than alone.

Andrea and Piergiuseppe Morone performed an experiment with students where they tried to elicit responses to risky choices, first individually, then in random groups of two. They confirm that in the first case, expected utility seems to be the best representation of the preferences, but in the second case disappointment aversion (commonly also called loss aversion) seems to be dominating. But this is far from being a proof yet, as only 38 students were part of the experiment. The authors also claim that this shows that preference aggregation drives out expected utility, a statement that can be misinterpreted. Indeed, this does not mean that aggregating individual decisions leads to a rejection of expected utility (say, in a representative agent framework). It only says that in situations where people take joint decisions, expected utility may be dominated.

1 comment:

Piergiuseppe Morone said...

Thanks for your post on our paper on individual and group decisions.
You are right, 38 subjects might be too small a sample for a group
experiment. Following the comment of a referee (ExpEcon) we have just
finished running a new experiment where we doubled the sample size. We
are now analyzing the new findings and we will keep you updated!

Piergiuseppe and Andrea