Group and individual risk preferences: A lottery-choice experiment with self-employed and salaried workers
Introduction
In many real life situations, important decisions are made by (small) groups such as production units, boards of directors, committees rather than by a single individual. This then raises the question of how the preferences of different group members are combined to produce the group decision. In spite of the fact that many important decisions are made collectively, economics has devoted little empirical attention to group decision-making. In this paper, we contribute to this literature by comparing group and individual decision-making. More precisely, we focus on decision-making under risk and compare group and individual risk preferences in a lottery-choice experiment inspired by Holt and Laury (2002). In this seminal paper, Holt and Laury used the results of a simple lottery choice experiment to determine the degree of risk aversion. Subjects were successively confronted with the following treatments: a real lottery with low payments (less than four Euros in both outcomes), a hypothetical lottery with high payments (the low payment outcomes multiplied by 20, 50 or 90), a real lottery with the same high payments, followed by the same real lottery with low payments as at the start of the sequence. Holt and Laury's most important results are that subjects exhibit risk aversion even for low payments and that risk aversion increases sharply as the scale of payoff increases (for real payoffs only).
In our experiment, the risk preferences of groups and individuals are compared by implementing three treatments over eight independent sessions. In the individual treatment (Ind), subjects were asked to choose between playing two lotteries, one “safe” and one “risky”, with varying probabilities of obtaining the higher monetary payoff. In the group treatment (Group), each individual was placed in an anonymous group of three and voted over which lottery was chosen. If no unanimous decision was reached in the vote, players were informed of other group members’ choices in the current vote, and then voted again. The voting rounds continued until agreement was reached or until five rounds were completed. If five rounds were completed without agreement, then the lottery option was randomly chosen by the computer. Finally, in a third treatment, called the choice treatment (Choice), subjects were asked to state a maximum willingness to pay for making their decisions alone instead of choosing in the group of three people (and thus express their preference over the first two treatments).
The originality of our research lies in the fact that we introduced variability in socio-demographic characteristics by recruiting “real people”, including not only students who are typically viewed as the standard subject pool used by experimenters, but also self-employed workers and salaried workers. Indeed, student samples exhibit limited variability in some key characteristics such as age or occupation that may be highly correlated with risk attitude. However, as Harrison and List (2004, p. 1009) noted, these last years, “more and more experimentalists are recruiting subjects in the field rather than in the classroom.”1 Introducing variability in sociodemographic characteristics among subjects allows us to investigate whether contextual effects are robust to the introduction of sociodemographic variables. In addition, it allows us to compare the relative influence of contextual (individual versus group decisions, prior experience, simultaneous versus sequential context) and non-contextual variables (sociodemographic variables) on risk decision. Are individuals more likely to be influenced in their decision by the context or by their intrinsic individual characteristics?
Moreover, do sociodemographic characteristics interact with these contextual variables? Our experiment seeks to provide a first experimental evidence of the link between risk attitude and employment status. In fact, several theoretical research studies emphasize the importance of unobservable factors such as attitudes toward risk and preferences for autonomy in the decision between self-employment and working for others. Partly drawing on Knight's (1921) classic work, Kihlstrom and Laffont (1979) and Rees and Shah (1986) posit that less risk adverse individuals are more likely to choose self-employment. In addition, models by Rees and Shah (1986) and Blanchflower and Oswald (1998) examine other aspects of self-employment such as “the flexibility associated with hours worked and the independence entailed,” and “the non pecuniary utility from being independent and one's own boss” (Blanchflower and Oswald, 1998, p. 31). However, there exists very little empirical evidence on the importance of these characteristics in the self-employment decision. In particular, we do not know whether attitudes toward risk or preferences for autonomy play a major role or only a minor role relative to those of human and social environment. In a recent study, using data on Finns born in 1966, Ekelund et al. (2005) found that risk-seekers are significantly more likely to choose self-employment. However in contrast to this paper, in our study, the direction of causality is from self-employment to risk attitude.
The main findings of our study are, consistent with previous work, that groups exhibit more risk aversion than individuals for high-risk lotteries. In addition, our results indicate a further explanation for group decision-making by showing that relative risk-loving subjects (those who are less risk-averse than the other two group members) are more willing to change their vote to conform to the group average risk decision than were relatively risk-averse players. Finally, apart from the context, our results show that a large part of risk attitude is explained by socio-demographic characteristics. In particular, individuals’ risk attitude seems to be strongly correlated with both the type and the sector (private or public) of employment. Those who are self-employed tend to be significantly less risk averse than others. In addition salaried workers employed in the private sector tend to take significantly more risk than salaried workers from the public sector.
The remainder of this paper is organized as follows. Section 2 summarizes the relevant previous research comparing groups and individuals. Our experimental design is presented in more detail in Section 3, and Section 4 presents and interprets the results of the experiment. Finally Section 5 summarizes and concludes.
Section snippets
Previous literature
A number of empirical results based on natural data concerning team versus individual decisions can be found in the existing literature (financial decisions in Prather and Middleton, 2002, productivity in Hamilton et al., 2003, and betting in Adams and Ferreira, 2007), but the majority of results have come from experimental economics. A recent, growing experimental literature has explored differences between individuals and teams (or between teams of different size) with respect to many
The experimental design
The experimental procedure is based on that of Holt and Laury. The experiment was computerized and the scripts were programmed using the z-tree platform (Fischbacher, 2007). We recruited 144 subjects among students, salaried workers and self-employed workers. Roughly 43% of our participants were salaried workers or self-employed. The remaining subjects were students who constituted our benchmark population in the experience. The students were recruited from undergraduate courses in business,
Individual and group decisions
Table 2 provides interesting information on the lottery choice frequencies for all treatments. Consistent with Holt and Laury's results, it indicates that in all treatments, most of players are risk averse and choose on average more than four safe options. Table 2 also indicates differences between treatments. The proportion of safe choice is higher in the group and choice treatments than in the individual treatment. For example 36.8% and 45.8% of subjects chose seven safe options, respectively
Conclusion and discussion
The main findings of our study are that both context and socio-demographic variables significantly influence the choice of risky options. Our results indicate that age, gender, or marital statute do not significantly influence the probability of choosing the safe option. In contrast, both the type and the sector (private or public) of employment seem to influence risk decisions significantly. Our results show that the self-employed report lower level of risk aversion than other individuals for
Acknowledgments
We are grateful to Glen Harrison, Jayson Lusk, Claude Montmarquette, the participants at the ESA North American Meeting (Tucson) and the participants at the Risk Attitude Workshop. We are also grateful to two anonymous referees. Thanks to Elven Priour for programming the experiment presented in this paper, to the ANR Risk Attitude (Agence Nationale de la Recherche) for a grant to support this research and to Pierre-Jean Richard from the “Club des créateurs et repreneurs d’entreprise d’Ille et
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