Many important economic, political, scientific, cultural, and military decisions are made by groups. Decision-making groups have many forms including families, committees, boards of directors, and legislatures. Many of these group decisions, especially the economic, military and political ones, are made in risky strategic environments in which the benefits or costs that result from a group's decisions depend on the decisions made by opponent groups.
But why is decision-making responsibility often assigned to groups, rather than individuals? Are important pieces of information possessed by different individual members who combine to form a group? Are groups inherently more rational decision-makers than individuals? Do groups make better decisions than individuals in some or all environments? And if so, does this reflect an advantage from having more information available? These are interesting empirical questions.
Research supported by this grant compares decisions made by competing groups with decisions made by competing individuals in controlled laboratory experiments conducted in a financially risky, strategic environment. The environment is that of a common value auction in which bidders do not know the value of the items they are bidding on but have one or more estimates of that value. Many naturally-occurring auction markets are characterized by bids for items of uncertain value, submitted by firms in which groups have determined the amounts to bid. In contrast, theory has assumed that the bidder is a single rational individual and most previous common value auction experiments have involved bids by individual decision-makers.
In these experiments, group decision-makers variously have more, the same, or less information than individual decision-makers (in different sessions). Group and individual decisions are compared with a quantitative measure of their deviation from minimally-rational decisions that yield the decision-maker zero, rather than negative, expected profit.
Beyond comparing group decisions with individual decisions, the research will include experiments designed to provide insight into the processes that competing groups use to arrive at their decisions in risky strategic environments. In one type of experiment, the amount of information or size of the market will be changed during experiments, group discussions will be video- and audio-taped for subsequent transcription and analysis of the reasoning used by groups to respond to these treatments. Previous experiments with individual decision-makers have found that they respond to an increase in the number of competing bidders by increasing their bids. This is in sharp contrast to rational bidding theory, which implies that bids vary inversely with the number of bidders. How will groups respond to these treatments?
In another category of experiment, computerized group support systems will be used to control the content of information that members of groups can exchange and to impose alternative decision rules such as simple majority voting and unanimous consent. The experiments of this type are designed to reveal whether group decisions in strategic games can be rationalized by the use of these systems and whether internet communication by groups, rather than face-to-face meetings, could support rational bidding.
