Teams clearly outperform individuals in economic decision-making. That is the key result of a
laboratory study by Professors Martin Kocher and Matthias Sutter, published in the
Economic Journal.
The two researchers show that the type of the decision-maker – an individual or a team –
makes a significant difference in an interactive economic environment, whether it’s the
investment and marketing strategies of companies and fund managers or the budget and
monetary policy-making of governments and central banks.
Small teams are smarter decision-makers than individuals because they are better at
processing information and better at predicting other decision-makers’ choices.
The growing importance of teams in firms, consulting and decision-making in general renders
these findings highly relevant. Decision-making teams are everywhere, including families,
boards of directors, legislatures and committees. Households and firms, the main players in
the economy, are typically not individuals but teams of people with a joint stake in their
decisions. Similarly, political and military decisions as well as decisions on monetary policy are
frequently taken by teams rather than by individuals.
In the laboratory setting that the researchers used to study the differences in decision-making
between small teams and individuals, there are four decision-makers. Each of them can
choose a number between (and including) zero and 100. The winner of the game is the
decision-maker with the number that is closest to two-thirds of the average of the four chosen
numbers. The game is repeated four times.
Despite its simplicity, this so-called ‘beauty-contest’ or ‘guessing’ game captures important
features of investment decisions in financial markets (as was first noted by John Maynard
Keynes). In the game as well as in financial markets, investors have to make guesses about
other investors’ views – whether they value a given asset high or low and what they think
about the future value of the asset.
In order to win in the experiment, it is not enough to know that the game’s ultimate outcome (its
‘equilibrium’) is for all decision-makers to choose zero, but decision-makers have to form
expectations about the decisions of others.
Kocher and Sutter find that teams (consisting of three people) are much better at guessing
what other decision-makers do in this game. In their experiment, teams win the game about
80% more often than individuals in cases where small teams compete against individuals.
When teams compete against teams and individuals against individuals, Kocher and Sutter
find that teams converge much faster to the game’s equilibrium (of choosing zero) than
individuals (see Figure 1 below). They explain these findings by the advantageous information
processing capacity of teams, which leads teams to grasp the dynamics of the game much
faster and to form more accurate expectations about the behaviour of other decision-makers.
Hence, teams are more appropriate decision-makers for important decisions in interactive
settings.
The basic pattern of the results by Kocher and Sutter can be applied to many team decisionmaking
situations, although their setting bears a special resemblance to financial markets. One
important practical implication of their research is that key decisions in an interactive economic
environment at the company level (such as investment or marketing strategies) as well as at
the macroeconomic level (such as monetary policy or the budget) should be taken by teams
rather than by individuals.
Although these findings might seem obvious, they are surprising when compared with scientific
knowledge from other disciplines. Psychological research, for example, concludes that team
discussion tends to attenuate, amplify or simply reproduce the judgmental biases of
individuals. Whether this unsatisfying conclusion carries over to interactive economic tasks has
now been answered by Kocher and Sutter.
Figure 1: Median chosen number in the guessing game
ENDS
Notes for editors: ‘The Decision Maker Matters: Individual versus Group Behaviour in
Experimental Beauty-contest Games’ by Martin Kocher and Matthias Sutter is published in the
January 2005 issue of the Economic Journal.
Kocher is at the University of Innsbruck; Sutter is at the Max Planck Institute for Research into
Economic Systems Jena.
For further information: contact Martin Kocher on +43-512-507-7172 (email:
martin.kocher@uibk.ac.at; http://homepage.uibk.ac.at/~c40433); Matthias Sutter on +49-3641-
686-642 (email: sutter@mpiew-mpg.de; http://www.mpiew-jena.mpg.de/esi/sutter/index.html);
or RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com).