How does choices made by others affect individual’s economic decisions
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Date
2019
Authors
Journal Title
Journal ISSN
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Publisher
Ivane Javakhishvili Tbilisi State University Press
Abstract
Experimental research has shown that people under uncertainty often observe
information about choices of others in a similar situation and resort to group behavior.
Human cognitive resources are limited, so they exhibit not fully but myopic rational
behavior. In certain situations, the method of decision-making heuristics, called counting
heuristic is observed. Group behavior can emerge when additional information is easily
accessible and inexpensive and when individuals trust the ability of others to make rational decisions.
Group behavior, arising by imitation of others, is not uncommon in situations in
which decision-making is made with a lack of information. Observing others reduces the
level of uncertainty, but sometimes it leads to undesirable results. Group behavior is the
result of a kind of externality that infl uences the perceptions of individuals through the
information received. This phenomenon is observed in consumers of certain products,
security analysts, general fund managers, banking service users and others.
An experiment was conducted in 1997 to investigate group behavior. The experiment
showed that group behavior emerged in 87 out of 122 total periods. In 26% of cases,
individuals made choices in favor of their own information even though repetition of
others’ behaviors was Bayes-optimal (Anderson & Holt, 1997). Later similar experiments
were conducted and participants with mixed signals were observed to form group behavior at almost every stage by repeating others’ choices (Sgroi, 2003). Behavior on the Internet is more contagious and the impact of imitation is more pronounced. The experiment has shown that the 5-star system and sales volume have a significant influence on individual decisions and often lead to group behavior (Chen, 2008).
The purpose of current study was to observe the decision-making process of
individuals and analyze the impact of group behavior on it in several ways. A total of 240 people participated in the survey. A game was developed for observing the decision-making process of individuals. Within the experiment participants had to choose one of the 10 suitcases in the hope of winning a possible 10 points. As it turned out, some individuals often resort to informational group behavior but not everyone. This study diff ers from earlier studies in that additional information requires some cost.
Some participants place greater importance on their own information than information
received from others. This is indicated by 68% of rational decisions, according to which
participants chose case 2 rather than 5 or 8, which would otherwise have equal probability of winning 10 points. Similarly, the analysis of the next situation showed that 80% chose case 2 against case 7, which still had the same chance of giving 10 points from the perspective of a myopic rational individual. The use of simple counting heuristic is not uncommon in individual decisions. Research shows that 58% of decisions are made using a heuristic, and 17% are in line with Bayesian updating.
These results can be applied to various types of public policy planning, as well as
development of marketing strategies by private fi rms. For example, in order to reduce
environmental pollution, reducing electricity consumption, cutting crime rates and many
other socially useful purposes, the state must take into account the factors that influence
group behavior. A good example of the successful use of group behavior is invitation of
Elvis Presley to television in 1956 to show the masses how he is getting vaccinated against poliovirus infection. As a result, vaccination rate has increased from 75% to 90%. Public figures have the power to influence the behavior of others and can be used by both state policy makers and private fi rms. Studies show that frequent news coverage of various crimes on television is causing an increase in this crime, as people think it has become a common occurrence.
Group behavior for firms is a powerful marketing trick to drive sales. Creating fake
buyers or offering very low price to first time buyers creates the impression that the product is much more desirable than it actually is. As a result, new buyers are emerging and fake demand will turn into real. This is even more evident in online sales, where consumers pay close attention to product reviews and comments by others. From the user’s point of view, it is important to know about group behavior and to be sure of the authenticity of others’ behavior so as not to be influenced by false recommendations and comments.
Description
Anderson L. R., Holt C. A. (1997, Dec.). Information Cascades in the Laboratory. The
American Economic Review, Vol. 87, No. 5, pp. 847-862.
Asch S. E. (1955, November). Opinions and Social Pressure. Scientific American, 19, pp. 31-35.
Batchelor R., Dua P. (1992). Conservatism and Consensus-Seeking among Economic
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Chen Y-F. (2008). Herd Behavior in Purchasing Books Online. Computers in Human
Behavior 24, pp. 1977–1992
Fischhoff B., Slovic P., Lichtenstein S. (1977). Knowing with Certainty: The Appropriateness of Extreme Confidence. Journal of Experimental Psychology 3, pp. 552-564.
Sgroi D. (2003). The Right Choice at the Right Time: A Herding Experiment in Endogenous Time. Experimental Economics, 6(2), pp. 159–180.
Keywords
Decision theory, group behavior, behavioral economics, bounded rationality
Citation
Economics and Business, №4, 2019, pp. 130-148