Social interaction effects and choice under uncertainty: an experimental study

Abstract: Extensive field evidence shows individuals ’ decisions in settings involving choice under uncertainty depend on the decisions of their peers. These peer group effects lead to cultures of risk taking and/or avoidance as well as magnifying the effect of policy interventions. 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 and possible effects 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, on average, reduces the likelihood that subjects will choose risky or ambiguous gambles. Our design allows us to eliminate social learning, social norms, group affiliation, and complementarities as possible causes for the observed peer group effects. We develop a model of social loss aversion which yields a form of social interaction effect and captures major features of the data