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A SUMMARY OF “ARE TWO HEADS BETTER THAN ONE?: AN EXPERINMENTAL
ANALYIS OF GROUP VS INDIVIDUAL DECISIONMAKING” by Blinder, A.S. and J. Morgan,
NBER Working Paper, 7909, 2000
12-July-2006
The two central questions for this paper are: 1) Do groups reach decisions more slowly than
individuals do? And are group decisions, on average, better or worse than individual decisions?
The authors constructed two laboratory experiments in which everything was kept equal except the
nature of the decision-making—they compared an individual versus a group answer to certain questions.
Each group consisted of five people who also participated as individuals. The experiments did not support
the commonly-held belief that groups reach decisions more slowly than individuals and found that groups,
on average, made better decisions than individuals.
In the first experiment, a purely statistical experiment was conducted without any economic
content. This experiment was a type of classic “urn problem” where subjects sample from an urn and are
asked to estimate its composition. “Electronic urns” were created, consisting initially of 50 per cent blue
balls and 50 per cent red balls. At some randomly chosen point in the experiment, the composition of the
urn would be changed to either 70 percent blue balls and 30 per cent red balls, or to 70 per cent red and 30
per cent blue without telling the subjects when the change took place and in which direction. The subjects
were asked to guess at which direction the change occurred.
In the second experiment, subjects were asked to steer an economy by manipulating the interest
rate. Neither experiment supported the commonly-held belief that groups reach decisions more slowly than
individuals and both of them found that groups, on average, made better decisions than individuals.
Furthermore, they did not find any differences between group decisions made by majority rule and group
decisions made under a unanimity requirement.
In this note, the monetary policy experiment will be summarised and its findings will be given, in
detail.
The Monetary Policy Experiment
In this experiment, the subjects played the role of policy makers. The sequences of the monetary
policy game are given as follows: 1) Instructions, 2) Practice rounds ( no score recorded), 3) Part One: 10
rounds played as individuals, 4) Part Two: 10 rounds played as a group under majority rule (alternatively,
under unanimity), Part Three: 10 rounds played as individuals, Part Four: 10 rounds played as a group
under unanimity (alternatively, under majority rule).
The authors programmed each computer with a simple two-equation macroeconomic model, which
is very popular in the recent literature on monetary policy. The model is given in the appendix.
The experimental subjects controlled the nominal interest rates and the played the role of the
Central Bank. In this experiment, fiscal expenditures (G) change randomly. Experimental subjects were
supposed to recognize changes in G and react to this change, with a lag, by raising or lowering the nominal
interest rate. G starts at zero and randomly changes to either + 0.3 or – 0.3 at sometime within the first 10
periods. The experiment begins with 2 per cent inflation, which is the inflation target. The shock, the
change in government expenditures (G) changes the unemployment rate at the same amount but in the
opposite direction according to the equation (1). From equation (2), we see that changes in unemployment
rate change inflation rate in the opposite direction. Changes in the inflation rate change the real interest rate
in the opposite direction, when other variables are kept constant.
In this model, monetary policy affects inflation indirectly, with a distributed lag, which begins two
periods later. When G increases, if it is not stabilized by monetary policy, the model diverges from
equilibrium. For example, when G increases, unemployment decreases, then inflation increases and if the
central bank does not raise nominal interest rates, the real interest rate declines further and stimulates the
economy more.
In each play, at the beginning, the system is at the steady state equilibrium with Gt = 0, current and
lagged nominal interest rates at 7 per cent ( 5 per cent real rate and 2 per cent inflation target), lagged
unemployment rate is 5 per cent, all the lagged inflation rates are 2 per cent. The computer calculated the
first-period values for the unemployment and inflation rates, these figures appeared on the screen. For each
subsequent period, new random values of et and wt are drawn, which create statistical noise. The computer
calculates Ut and ∏t and shows them on the screen, with all past values. Subjects are then asked to choose
an interest rate for the next period.
At some period chosen at random from a uniform distribution between t=1 and t=10, Gt is either
increased to + 0.3 or decreased to -0.3. (Whether G rises or falls is also decided randomly). Subjects are
not told when G changes and its direction. However, students are told that the probability laws that govern
the changes.
Each play of the game continues for 20 periods. Each period is considered as a quarter. To evaluate
the quality of the decisions, the following absolute- value loss function is defined:
st = 100 – 10 │Ut – 5│– 10 │∏t -2 │
2
The score for the whole game (S), is calculated as the unweighted average of st over the 20
quarters. At the end of the entire session, scores are converted into money at the exchange rate of 25 cents
for each percentage point. Theoretically, the maximum amount that can be earned is $ 25.
Subjects may receive several false signals before G actually changes. A two-standard deviation et
shock appears like a negative G shock; although changes in G are permanent and et shock is temporary.
Moreover, subjects are not allowed to know the size of the G shock and the standard deviations of et and
wt.
Subjects change the interest rate up and down almost every period, this type of response makes it
difficult to measure the decision lag in monetary policy. That is because; subjects are charged a fixed cost
of 10 points each time when they change the rate of interest.
Students can communicate freely as much as they want, during group play, but they cannot
communicate with each other during individual play. In the monetary policy game context, regarding the
hypothesis H1= groups make decisions more slowly than individuals; the authors did not find any support
for this hypothesis. Moreover, regarding the hypothesis, H2= groups make better decisions than
individuals; they found that group decisions were superior to individual decisions without being slower.
They did not find any difference between groups operating under majority rule and groups operating under
unanimity rule. Hence, they could not support the hypothesis H3= decisions by majority rule are made
faster than under a unanimity requirement.
Appendix
The model:
(1) Ut – 5 = 0.6 (U t-1 - 5) + 0.3 ( i t-1 – ∏ t-1 – 5 ) – Gt + et
(2) ∏t = 0.4 ∏ t-1 + 0.3 ∏ t-2 +0.2 ∏ t-3 +0.1 ∏ t-4 –0.5 (U t-1 - 5) + wt
where U is the unemployment rate, the assumed “natural rate” is 5 %, i is the nominal interest rate and ∏ is
the rate of inflation, G indicates the fiscal expenditures. The equilibrium real interest rate is set at 5 %.
Parameter values were chosen from the US economy, not estimated.
Equation (1) can be considered as a reduced form combining an IS curve with Okun’s Law. Higher
(lower) real interest rates will increase (decrease) unemployment. Equation (2) is a standard accelerationist
Phillips curve. In this model, inflation depends on the lagged unemployment rate and on its four lagged
values, with weights summing to one. The weighted average of past inflation rates can be thought of as
representing expected inflation.
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In this experiment, there are two stochastic shocks, et and wt, and they are drawn from uniform
distributions on the interval [-0.25, +0.25]. Their standard deviations are approximately 0.14, or about half
the size of the G shock.
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