Two novel models of decision making and information processing are developed in this study. The mathematical properties of these models will be of interest to economic theorists. In addition, the resulting models will help to organize puzzling observations and suggest new ways to understand and deal with behavioral biases.
One model examines the group polarization phenomenon: the tendency for groups to make more extreme decisions that the individuals within the group would make in isolation. The literature on this topic often associates group polarization with irrationality, but it does not supply a model of what rational behavior is. This study develops a benchmark model. The model makes it possible to investigate when there is a systematic relationship between the decisions individual would make in isolation and the decisions the same individuals would make it permitted to share information and select a consensus choice. The conditions under which group polarization is consistent with the rational model are also determined.
The second model accounts for the finding that people tend to have positive self image: when comparing themselves to others, individuals overestimate their good qualities. The model assumes that people know their own quality, but observe the quality of others with an error, which may be biased due. The model is capable of describing empirical regularities that are not explained by the leading motivational models of positive self image. For example, the model predicts the existence of negative self imagine under some circumstance and implies that there will be more positive self image when success is easy to obtain. The model makes testable predictions that distinguish it from alternative models.
Broader Impacts: Recognition that decision makers exhibit systematic biases in the way that they make choices has implications for the design of economic institutions. Positive self image has been associated with excessive risk taking and poor life-cycle planning (either in career choice or savings behavior). The explanation for positive self image offered in this study suggests that a natural intervention, providing more information, will reduce decision making bias. The phenomenon of group polarization has led some legal scholars to propose reforms to the jury system, especially with respect to the jury's role in assigning punitive damages. One cannot evaluate the cost and benefits of these proposals without a model like the one developed in this study.
