Thursday, August 30, 2012

Are Groups More Rational than Individuals?

"A decision maker in an economics textbook is usually modeled as an individual whose decisions are not influenced by any other people, but of course, human decision-making in the real world is typically embedded in a social environment. Households and firms, common decision-making agents in economic theory, are typically not individuals either, but groups of people—in the case of firms, often interacting and overlapping groups. Similarly, important political or military decisions as well as resolutions on monetary and economic policy are often made by configurations of groups and committees rather than by individuals."

Thus starts an article called "Groups Make Better Self-Interested Decisions," by Gary Charness and Matthias Sutter, which appears in the Summer 2012 issue of my own Journal of Economic Perspectives. (Like all articles appearing in JEP back to 1994, it is freely available on-line courtesy of the American Economic Association.) They explore ways in which individual decision-making is different from group decision making, with almost all of their evidence coming from behavior in economic lab experiments. To me, there were two especially intriguing results: 1) Groups are often more rational and self-interested than individuals; and 2) This behavior doesn't always benefit the participants in groups, because the group can be less good than individuals at setting aside self-interest when cooperation is more appropriate. Let me explore these themes a bit--and for some readers, offer a quick introduction to some economic games that they might not be familiar with.

There has been an ongoing critique of the assumption that individuals act in a rational and self-interested manner, based on the observations that people are often limited in the information that they have, muddled in their ability to process information, myopic in their time horizons, affected by how questions are framed, and many other "behavioral economics" issues. It turns out that in many contexts, groups are often better at avoiding these issues and acting according to pure rationality than are individuals.

As one example, consider the "beauty contest" game. As Charness and Sutter point out: "The name of the beauty-contest game comes from the Keynes (1936) analogy between beauty contests and financial investing in the General Theory: “It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” Similarly, in a beauty-contest game, the choice requires anticipating what average opinion will be."

The game works like this. A group of players is told that they should choose a number between 0 and 100, and the winner of the game will be the person who chooses a number that is (say) 1/2 of the average of the other choices. In this game, the rational player will reason as follows: "OK, let's say that the other players choose randomly, so the average will be 50, and I should choose 25 to win. But if other players have this first level of insight, they will all choose 25 to win, and I should instead choose 12. But if other players have this second level of insight, then they will choose 12, and I should choose 6. Hmmm. If the other players are rational and self-interested, the equilibrium choice will end up being zero."

The players in a beauty contest game can be either individuals or groups. It turns out that groups choose lower numbers: that is, as a result of interacting in the group, they tend to be one step ahead.

Here's another example, called the "Linda paradox," in which players get the following question (quoting from Charness and Sutter):

"Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations. Which is more probable:
(a) Linda is a bank teller.
(b) Linda is a bank teller and is active in the feminist movement."

Notice that Linda is a bank teller in both choices, but only active in the feminist movement in the second choice: that is, the second choice is a subset of the first choice. For that reason, it is impossible for choice b to be more likely than choice a. However, early research on this question found that 85% of individuals answered b. But when the game is played with groups of 2, and with groups of 3, the error rate drops.

Charness and Sutter offer a number of other examples, but the underlying themes are clear. In many settings, a group of people is likely to be better than an individual at processing a question, processing information, and acting in a rational answer. However, there are a number of settings in which pure self-interest can be self-defeating, and a more cooperative approach is useful. It turns out that individuals are often better than groups at setting aside pure self-interest and perceiving such opportunities.

Here's an example called the "trust game." In this game, the first player starts with a certain sum of money. Player 1 divides the money and passes part of it to Player 2. The experimenter triples the amount passed to Player 2. Player 2 then divides what is received, and passes part of the money back to Player 1.  In this kind of game, clearly what's best for both players is if Player 1 gives all of the money to Player 2, thus tripling the entire total, and trusts that Player 2 will return enough to make such this worthwhile. However, a strictly self-interested Player 2 may see no reason in this game to send anything at all back to Player 1, and Player 1, perceiving this, will then see no reason to send anything to Player 2. If both players act in a self-interested manner, both can end up worse off.

It turns out that when groups play this game, when they are acting they send less of the pot from Player 1 to Player 2 than do individuals, and they return less of the pot from Player 2 to Player 1 than do individuals. Thus, groups pursue self-interest in a way that reduces the potential returns from cooperation and trust, as compared with individuals.

Much remains to be done in comparing actions of groups and individuals in a wider variety of contexts. But these results intrigue, because they seem to point toward an economic theory of when group decision-making might be preferable to that of individuals, and vice versa. For example, when looking at a potentially complex problem, where the appropriate decision isn't clear, getting a group of people with diverse backgrounds and information can be quite helpful in leading to a more rational decision. But groups can also become large enough that they don't work well in gathering input from individuals, and become unable to move ahead with decisions.

The results also suggest that economists and social scientists should be cautious in making quick-and-dirty statements about how economic actors either do engage or don't engage in rational self-interested behavior. For example, it's possible to have a bunch of individuals who can't manage to lose weight or save money when acting on their own, but who find a way to do so when acting acting as a group and reinforcing each other. A person may act irrationally in some aspects of their personal life, but still be a useful member of a highly rational group in their work environment.  On the other side, in situations calling for gains from cooperation, pitting one group against another may be dysfunctional.  For example, many negotiations in business and politics follow the model of designating a lead negotiator, and descriptions of such negotiations often suggest that good negotiators form a bond with those on the other side that helps a compromise to emerge.