Social Interaction Effects and Choice Under Uncertainty: An Experimental Study

Extensive field evidence shows individuals’ decisions in settings involving choiceunder 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 utilityfrom an action is enhanced by others taking the same action. We employ a series of controlledlaboratory experiments to study the causes of peer effects in choice under uncertainty. We findstrong peer group effects in the laboratory. Allowing feedback about others’ choices increasesgroup polarization and reduces the likelihood that subjects will choose risky or ambiguousgambles. We observe spillover effects, as observing another’s choice of one risky (safe) gamblemakes all risky (safe) gambles more likely to be chosen...