Experimental Economics

, Volume 15, Issue 3, pp 373–397 | Cite as

Two heads are less bubbly than one: team decision-making in an experimental asset market

Article

Abstract

In the world of mutual funds management, responsibility for investment decisions is increasingly entrusted to small teams instead of individuals. Yet the effect of team decision-making in a market environment has never been studied in a controlled experiment. In this paper, we investigate the effect of team decision-making in an asset market experiment that has long been known to reliably generate price bubbles and crashes in markets populated by individuals. We find that this tendency is substantially reduced when each decision-making unit is instead a team of two. This holds across a broad spectrum of measures of the severity of mispricing, both under a continuous double-auction institution and in a call market. The result is not driven by reduced turnover due to time required for deliberation by teams, and continues to hold even when subjects are experienced. Our result also holds not only when our teams treatments are compared to the ‘narrow’ baseline provided by the corresponding individuals treatments, but also when compared more broadly to the results of the large body of previous research on markets of this kind.

Keywords

Group decision-making Price bubbles Asset market experiments 

JEL Classification

C92 D70 G12 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Supplementary material

10683_2011_9304_MOESM1_ESM.pdf (1.9 mb)
(PDF 48.8 kB)

References

  1. Ackert, L. F., & Church, B. K. (2001). The effects of subject pool and design experience on rationality in experimental asset markets. The Journal of Psychology and Financial Markets, 2(1), 6–28. CrossRefGoogle Scholar
  2. Baker, R. J. I., Laury, S. K., & Williams, A. W. (2008). Comparing small-group and individual behavior in lottery-choice experiments. Southern Economic Journal, 75(2), 367–382. Google Scholar
  3. Bär, M., Ciccotello, C. S., & Ruenzi, S. (2010). Risk management and team-managed mutual funds. Journal of Risk Management in Financial Institutions, 4(1), 57–73. Google Scholar
  4. Bär, M., Kempf, A., & Ruenzi, S. (2011). Is a team different from the sum of its parts? Evidence from mutual fund managers. Review of Finance, 15(2), 359–396. CrossRefGoogle Scholar
  5. Blinder, A. S., & Morgan, J. (2005). Are two heads better than one? Monetary policy by committee. Journal of Money, Credit, and Banking, 37(5), 789–811. CrossRefGoogle Scholar
  6. Bliss, R. T., Potter, M. E., & Schwarz, C. (2008). Performance characteristics of individually-managed versus team-managed funds. Journal of Portfolio Management, 34(3), 110–118. CrossRefGoogle Scholar
  7. Bone, J., Hey, J., & Suckling, J. (1999). Are groups more (or less) consistent than individuals? Journal of Risk and Uncertainty, 18(1), 63–81. CrossRefGoogle Scholar
  8. Caginalp, G., Porter, D. P., & Smith, V. L. (1998). Initial cash/asset ratio and asset prices: An experimental study. Proceedings of the National Academy of Sciences of the United States of America, 95(2), 756–761. CrossRefGoogle Scholar
  9. Caginalp, G., Porter, D. P., & Smith, V. L. (2001). Financial bubbles: Excess cash, momentum, and incomplete information. The Journal of Psychology and Financial Markets, 2(2), 80–99. CrossRefGoogle Scholar
  10. Casari, M., Zhang, J., & Jackson, C. (2010). Do groups fall prey to the winner’s curse? Institute for Empirical Research in Economics, University of Zurich. Google Scholar
  11. Charness, G., Karni, E., & Levin, D. (2007). Individual and group decision making under risk: An experimental study of Bayesian updating and violations of first-order stochastic dominance. Journal of Risk and Uncertainty, 35(2), 129–148. CrossRefGoogle Scholar
  12. Cooper, D. J., & Kagel, J. H. (2005). Are two heads better than one: Team versus individual play in signaling games. American Economic Review, 95(3), 477–509. CrossRefGoogle Scholar
  13. Cox, J. C., & Hayne, S. C. (2006). Barking up the right tree: Are small groups rational agents? Experimental Economics, 9(3), 209–222. CrossRefGoogle Scholar
  14. Davies, T. (2006). Irrational gloominess in the laboratory. University of Arizona. Google Scholar
  15. Fischbacher, U. (2007). z-Tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, 10(2), 171–178. CrossRefGoogle Scholar
  16. Haruvy, E. E., & Noussair, C. N. (2006). The effect of short selling on bubbles and crashes in experimental spot asset markets. The Journal of Finance, 61(3), 1119–1157. CrossRefGoogle Scholar
  17. Haruvy, E. E., Lahav, Y., & Noussair, C. N. (2007). Traders’ expectations in asset markets: Experimental evidence. American Economic Review, 97(5), 1901–1920. CrossRefGoogle Scholar
  18. Haruvy, E. E., Noussair, C. N., & Powell, O. (2009). The impact of asset repurchases and issues in an experimental market. Tilburg University. Google Scholar
  19. Holt, C. A., & Laury, S. K. (2002). Risk aversion and incentive effects. American Economic Review, 92(5), 1644–1655. CrossRefGoogle Scholar
  20. Hussam, R. N., Porter, D. P., & Smith, V. L. (2008). Thar she blows: Can bubbles be rekindled with experienced subjects? American Economic Review, 98(3), 924–937. CrossRefGoogle Scholar
  21. Kachelmeier, S. J., & Shehata, M. (1992). Examining risk preferences under high monetary incentives: Experimental evidence from the People’s Republic of China. American Economic Review, 82(5), 1120–1141. Google Scholar
  22. King, R. R., Smith, V. L., Williams, A. W., & Boening, M. V. (1993). The robustness of bubbles and crashes in experimental markets. In R. H. Day & P. Chen (Eds.), Nonlinear dynamics and evolutionary economics (pp. 183–200). Oxford: Oxford University Press. Google Scholar
  23. Kocher, M. G., & Sutter, M. (2005). The decision maker matters: Individual versus group behaviour in experimental ‘beauty-contest’ games. Economic Journal, 115(500), 200–223. CrossRefGoogle Scholar
  24. Palan, S. (2009). Lecture notes in economics and mathematical systems: Vol. 626. Bubbles and crashes in experimental asset markets. Heidelberg: Springer. CrossRefGoogle Scholar
  25. Porter, D. P., & Smith, V. L. (1994). Stock market bubbles in the laboratory. Applied Mathematical Finance, 1(4), 111–127. CrossRefGoogle Scholar
  26. Porter, D. P., & Smith, V. L. (1995). Futures contracting and dividend uncertainty in experimental asset markets. Journal of Business, 68(4), 509–541. CrossRefGoogle Scholar
  27. Rockenbach, B., Sadrieh, A., & Mathauschek, B. (2007). Teams take the better risks. Journal of Economic Behavior & Organization, 63(3), 412–422. CrossRefGoogle Scholar
  28. Samuelson, W. F., & Bazerman, M. H. (1985). The winner’s curse in bilateral negotiations. In V. L. Smith (Ed.), Research in Experimental Economics (Vol. 3). Greenwich: JAI Press. Google Scholar
  29. Shupp, R. S., & Williams, A. W. (2008). Risk preference differentials of small groups and individuals. Economic Journal, 118(525), 258–283. CrossRefGoogle Scholar
  30. Smith, V. L., Suchanek, G. L., & Williams, A. W. (1988). Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica, 56(5), 1119–1151. CrossRefGoogle Scholar
  31. Smith, V. L., van Boening, M. V., & Wellford, C. P. (2000). Dividend timing and behavior in laboratory asset markets. Economic Theory, 16(3), 567–583. Google Scholar
  32. van Boening, M. V., Williams, A. W., & LaMaster, S. (1993). Price bubbles and crashes in experimental call markets. Economics Letters, 41(2), 179–185. CrossRefGoogle Scholar
  33. van Rooij, M., Lusardi, A., & Alessie, R. (2011). Financial literacy and stock market participation. Journal of Financial Economics, 101(2), 449–472. CrossRefGoogle Scholar

Copyright information

© Economic Science Association 2011

Authors and Affiliations

  1. 1.School of EconomicsThe University of SydneySydneyAustralia
  2. 2.Institute of Banking and FinanceKarl-Franzens-Universität GrazGrazAustria

Personalised recommendations