UiS Working Papers in Economics and Finance,
University of Stavanger

Abstract: Extensive field evidence shows individuals’ decisions in settings involving choice under uncertainty (e.g. savings and investment choices) depend on the decisions of their peers. One hypothesized cause of peer group effects is social interaction effects: an individual’s utility from an action is enhanced by others taking the same action. We employ a series of controlled laboratory experiments to study the causes of peer effects in choice under uncertainty. We find strong peer group effects in the laboratory. Allowing feedback about others’ choices increases group polarization and reduces the likelihood that subjects will choose risky or ambiguous gambles. We observe spillover effects, as observing another’s choice of one risky (safe) gamble makes all risky (safe) gambles more likely to be chosen. Our design allows us to eliminate social learning, social norms, group affiliation, and complementarities as possible causes for the observed peer group effects, leaving social interaction effects as the likely cause. We use a combination of theory and empirical analysis to show that preferences including “social regret” are more consistent with the data than preferences including a taste for conformity.

Keywords: experimental economics; social interaction effects; risk; uncertainty

JEL-codes: C91; D14; D80; G11

49 pages, June 14, 2008

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