Assignment 1: Discussion—The Power of Groups

Groups may be both a boon (for example, they statistically outperform individuals) and a bane (for example, they take too long) of decision making. While they can systematically outperform individuals, groups are also prey to systematic bias and organizational skewing.

Consider the systematic decision-making processes of your own organization. Using the readings for this module, the Argosy University online library resources, and the Internet, respond to the following:

What are the group decision-making processes and structures in place at your current or with a previous employer that were designed to eliminate bias, create structure, and cultivate consistently better decisions?
Were the processes successful? Why, or why not?
How may the structure have facilitated organizational skewing?

Write your initial response in a minimum of 300 words. Apply APA standards to citation of sources.

By Wednesday, July 2, 2013, post your response to the appropriate Discussion Area. , review and comment on at least two peers’ responses. Consider the following in your comments:

What are the other issues you may perceive in the structures your peers have described in their posts?
What recommendations would you make to further objectify the systems they have in place?

Assignment 1 Grading Criteria	Maximum Points
Initial response: Was insightful, original, accurate, and timely.Was substantive and demonstrated advanced understanding of concepts.Compiled/synthesized theories and concepts drawn from a variety of sources to support statements and conclusions.
Discussion response and participation: Responded to a minimum of two peers in a timely manner.Offered points of view supported by research.Asked challenging questions that promoted the discussion.Drew relationships between one or more points in the discussion.
Writing: Wrote in a clear, concise, formal, and organized manner.Responses were error free.Information from sources, where applicable, was paraphrased appropriately and accurately cited.
Total:

“Social loafing” describes the fact that people tend to work harder as individuals than as members of groups. The net result of this effect can be that groups are less effective unless incentives are in place to motivate individuals.

Another group pitfall is “conformity.” Conformity, as the word suggests, refers to matching one’s belief systems, attitudes, appearance, and behaviors to the perceptual norm of the group. This can have disastrous consequences for organizations when the majority view leads to poor decisions. Being complicit with the group point of view clearly puts limits on both creativity and the available frames.

Finally, similar to conformity, “groupthink” diminishes the values of individual creativity, uniqueness, and independent thinking. It occurs when insulated groups succumb to local loyalties and the related pressures to conform to the group. These conformance pressures tend to limit critical evaluation of alternative solutions in favor of consensus and conflict avoidance. Groupthink can lead to decaying judgment and efficiency. However, it is also true that groupthink, when appropriately facilitated, can accelerate the decision-making process and improve its precision.

Of course, groups are fertile incubators of creativity and thereby, new frames and previously unseen options. Groups benefit enormously from repeatable frameworks and centralized, policy-based rules. These tools streamline, or help manage, complex decisions as well as help alleviate the social pitfalls outlined. They also tailor decision-making processes to coincide with the strategies, structures, and even the incentive schemes of organizations so that managerial choices reinforce organizational strategy.

In light of the limitations of group decision making, it is important to understand where crowd-based solutions lose their luster, or even completely fail, and how and where decentralized decision making offers superior outcomes.

Roughly two-thirds of the US economy is attributed to consumer spending or roughly 10 trillion dollars in 2010 (US Department of Commerce: Bureau of Economic Analysis, 2011). This enormous amount of capital itself as well as how it is utilized is of constant interest to marketers, economists, and political leaders. Beyond the influences of social heuristics, how do your own internal metrics and accounting principles influence your decisions and how can those practices create opportunities? In other words, what is your mental accounting?

In 1980, Richard Thaler coined the term mental accounting in an attempt to describe how people categorize and quantify economic outcomes (Thaler, 1980). Eight years later, Shefrin and Thaler proposed that mental accounting is divided into discrete repositories; these “buckets” are current income, current wealth, or future income. Moreover these buckets have some interesting qualities from a cognitive and subsequently, accounting perspective (Shefrin & Thaler, 1988).

These accounts are largely non-fungible and the marginal propensity to consume from each account is different. The implications for this are profound; how utility is evaluated varies based on the mental account used. Likewise, perception of value changes at different points in time; people are prey to subjective frames.

Adding complexity to this mix, it is true that in your mental accounting applies two values to any transaction—acquisition value and transaction value. The acquisition value is the money you will trade to physically acquire a good or service while the transaction value is the price you place on getting a good deal.

Finally, the value placed on gains and losses differs between individual mental accounting. Similar to prospect theory, people have a tendency to skew utility in order to minimize losses and maximize gains.

Mental accounting of consumer-oriented decisions, coupled with the complexity of consumer choice (imagine all the different options and financing plans on the car purchase), and the departures taken from perfect rationality all influence consumer behavior. They determine when an individual chooses to act or postpone a purchase, how he or she perceives gains and losses, and how timing bears on the individual’s choices. Marketers especially want to leverage these predilections to frame one’s perceptions and choices in nonrational ways. However, one’s personal balance between self-control and buyer’s remorse is at stake.

Shefrin, H. H., & Thaler, R. H. (1988). The behavioral life-cycle hypothesis. Economic Inquiry, 26, 609–643.

Thaler, R. H. (1980). Towards a positive theory of consumer choice. Journal of Economic Behavior and Organization, 1, 39–60.

US Department of Commerce: Bureau of Economic Analysis. (2011). National economic accounts: National GDP. Retrieved from

http://www.bea.gov/national/#gdp

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Decision biases in intertemporal choice and choice under uncertainty: Testing a common account
Chapman, Gretchen B;Weber, Bethany J
Memory & Cognition (pre-2011); Apr 2006; 34, 3; ProQuest Central
pg. 589

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Individual Decision Making and Group Decision Processes

John Payne and Arnold Wood

Arnold Wood: One of the great benefits of this group
is that you get introduced to people who are in-
credibly helpful and incredibly nice. One such
person is John Payne who has done yeoman’s ser-
vice at Duke being a dean, teacher, all those sorts
of things at one time. Yet he was nice enough to
join me in this survey of investment committees
and John is going to basically shoulder the entire
section and I’ll serve as the poster boy for this.

I have the survey here if anybody wants to look
at it.

John Payne: Thank you, Arnie.
Yesterday and today we’ve talked about issues

dealing with individuals with a focus on where
they’re not good at probability judgments, etc.
We’ve also talked about aggregates of individuals,
markets, and market behavior, either in the form of
empirical data like we’ve just seen here on histori-
cal markets situations. What I would like to do
now is focus in on another level of analysis dealing
with committee or group decisions.

In thinking about this talk, Arnie Wood and I
were faced with a challenge. There’s a lot of litera-
ture on group decision-making, but little or none on
investment committees. Arnie then gave me a num-
ber that as a psychologist is hard to conceptualize.
He said that as a rough estimation, investment com-
mittees are responsible or oversee something more
than $6 trillion in investments worldwide.

We have a situation where there’s this very im-
portant activity performed by investment commit-
tees and there seems to be almost no data on in-
vestment committee behavior. We do have a lot of
data on group behavior, just nothing or little on in-
vestment committees. Arnie and I then came up
with a plan that would have three parts to it. Part 1
is to briefly review the group literature with a spe-
cific focus on both classic and new results that we
thought were of greatest interest to investment

committee decision-making. Second, Arnie and I
wanted to collect some data on investment com-
mittees to share with you today. We’ve done a little
survey of people who are involved in investment
committees. And last, we decided to do this talk
together, combining someone who does this for a
living (Arnie) and someone who is most concerned
with understanding the psychology involved.

Now, to begin with Arnie’s view on an invest-
ment committee. Is there anyone else that serves
on an investment committee of any kind? Can I see
a show of hands here? Okay. One, two, three, four,
five, six, seven. Great. So we’ve got a lot of exper-
tise here.

If you look at the writing on committees and
group decision-making, it’s really striking. There
are two different viewpoints that you can see out in
the literature. Now, the first view is that committee
decisions are an improvement on us poor individu-
als and the idea is that none of us is as smart as all
of us. For example, we may individually have
some biases and not be able to figure out how to
estimate the probability that you’re going to have
AIDS if you get positive tests and so on, but if we
put us all together we’ll figure it out because we’ll
be smart enough as a group to do that.

And in the finance area, Merrill Lynch thought
that committees will make financial decisions and
these will be better managed. Now, I have never
been able to find the exact source of this saying,
but the old joke that a camel is a horse designed by
a committee represents the alternative view of
committee decisions. That’s unfair to the camel
because the camel has a lot of positives to it. How-
ever, consider this quote from Business Week:
“Some fund groups are successfully run by com-
mittee. However, it’s generally thought that they
diminish returns.” Also, Terrance Odean has a
wonderful paper dealing with investment clubs
that has the idea that too many cooks spoil the
profits. I should say to Terry that this particular pa-
per has caused me great grief in my family rela-
tionships. My wife is a member of an investment
club and when I shared those results with her, she
didn’t speak to me for about a week.

All right. So first question to ask Arnie Wood is,
why do funds, whether it be a museum or it be some
other organization, form an investment committee
to manage their money? What’s the idea behind it?

The Journal of Psychology and Financial Markets
2002, Vol. 3, No. 2, 94–

101

John Payne is the Joseph J. Ruvane, Jr. Professor of Manage-
ment, Professor of Psychology and Research Professor of Statistics
& Decision Sciences at The Fuqua School of Business at Duke
University.

Arnold Wood is a founding Partner, President and Chief Execu-
tive Officer of Martingale Asset Management, L.P., where he is re-
sponsible for managing the firm.

Requests for reprints should be sent to: John Payne, Fuqua School
of Business, Duke University, Box 90120, Durham, NC 27708.
Email: jpayne@mail.duke.edu

Arnold Wood: The concept is quite simple. It’s re-
ally a forum for people to share information. I
mean you can congregate a variety of skills in one
place and presumably come to better decisions,
but that’s kind of the textbook side of it. There’s
some other issues here that we’ve uncovered,
some having to do with status and so on that being
on an investment committee gives you a certain
amount of status. That, in fact, in one particular in-
stance I’m aware of, if you have important people
on your investment committee it helps your fund
raise better because these are good people and
they’ll take care of your money and they may
make lousy investment decisions for the organiza-
tion they’re supposed to be working for. But they
do raise more money than they lose and there are
the opportunity costs on the other side of it. And I
think the primary reason that we seem to think ex-
ists out there is an issue of blame. I mean these
people are agents and no one person wants to get
blamed for the responsibility of running a large
endowment or foundation. They want to share that
blame and there are a variety of reasons, some
good and some, oh, I won’t say bad, but some are
very questionable.

John Payne: When you think about it in terms of the
advantages of committees or groups, the idea seems
reasonable that none of us knows as much as all of
us. So you have different people, different back-
grounds, different experience, different knowledge
bases and if we bring them together, we’re going to
get that information shared. That is, by the way, an
interesting applied question. Who should you bring
together in a committee? One of the results we
found when we asked the question to people that
were on investment committees in terms of mem-
bership, what was the result, Arnie?

Arnold Wood: It’s an incredible number. When they
brought these people together we asked questions
like, how many minorities are on your committee.
I think in all the answers we got there were two
people who would be considered minority, either a
woman or otherwise a minority. There was no one
under 30 years of age, 90 percent of the people
were essentially white men over the age of 40, of
which most of those were 60 and beyond. So this
is a homogeneous group of people who are there
probably for other reasons, such as to talk about
things other than what they’re on the committee
for, and I’m sure you’re going to talk about a com-
mon knowledge effect.

John Payne: A piece of advice for people who are
responsible for investment committees is that if
you have a committee of, say, 16 people, large
committee, but they are related in the sense that
their judgments tend to be correlated because they
have the same backgrounds, same information and

so on. For example, if they’re correlated at about
0.3, you can do as well as that 16-person commit-
tee with a committee of four people, if those four
people are selected so that the correlation among
their judgments is much lower. Therefore, one
piece of advice, if you’re involved in putting to-
gether an investment committee, you’re much
better off putting your resources in trying to find a
small number of relatively independent judges
than you are in spending a lot of money getting a
lot of judges on a committee.

Arnold Wood: One of the less obvious reasons why
people are members of a committee is because you
put them on the investment committee, they gener-
ally are large donators to the college or wherever it
is, so they’re on there to basically—I don’t want to
say a pay-back—but to show gratitude for their
support for the organization.

John Payne: Besides information, the other good ar-
gument for committees is basically what’s called
error checking. One of us may make a flawed cog-
nitive process, but hopefully there will be some-
one else in the committee who will pick that up.
For example, you forgot to consider base rates or
you are worrying too much about sunk cost, and
we all know that sunk cost shouldn’t influence de-
cision. So the idea is you will get some error
checking.

You also may involve people into committees
simply on the value idea of incorporating different
values. So one argument would be that you might
have people on a committee who represent knowl-
edge about finance, but you also might have peo-
ple on that committee who represent knowledge
about the organization that’s being supported by
those investments and the values that they have.

An interesting question is that with all these po-
tential advantages, why do you get that negative
view of committee decisions? Why is it that too
many cooks may spoil the broth or the profits? The
argument is that there are sources of what are
called process losses. The basic idea is that when
you think about effective groups, you’ve got three
things going on. One item is what you start with in
the quality of people who are part of the commit-
tee, how good a job you’ve done at bringing in
people, how correlated they are, for example, in
their information bases, etc. That really tells you
something about the potential of the group.

Now, over and above that you would like to
have some things happen when people get to-
gether, such as face-to-face conversations and we
actually hope things are going to happen posi-
tively by having us together in this room. For in-
stance, you learn from each other. And then there
are, unfortunately, things that can perhaps work
not so well, that lead to process loss. Process

INDIVIDUAL DECISION MAKING AND GROUP DECISION PROCESSES

losses can be either cognitive losses or motiva-
tional losses. For instance, information sharing
should be one of the strengths of groups, however
there’s data that suggests it’s a place where groups
are not as good as they might be. One of Arnie’s
favorite examples of motivation loss is social loaf-
ing. That is the idea that you can hide in a commit-
tee, and maybe not work quite as hard if you’re up
there by yourself.

Finally, there are what I call social interaction
effects. These are not studied that much in the
group decision literature. One of them might be
called an illusion of effectiveness that is one thing
a lot of people seem to believe, that as a group they
are, in fact, smarter or better. And so there’s this
strong belief out there that groups are, in fact, very
effective. As part of our survey we asked people,
how correct or accurate do you think your group
is? The answer was something like 75, 80 percent
of their decisions they thought were right. We
asked them a second question that is; do you think
that groups are more or less accurate in quality de-
cisions than individuals? The majority of the re-
spondents said that the group or committee was
better. So you may get illusions of effectiveness.

We’ll also talk about some data that’s come out
recently, which is that in the discourse that hap-
pens in face-to-face meetings, there’s some evi-
dence that suggests that certain kinds of argu-
ments, perhaps representing shared values, norms
or mental models, tend to take on a special status.
And what can happen is the force of group discus-
sion reinforces that kind of shared belief.

So one thought I’ll have, and we’ll be specu-
lating about later on, is something that came up
yesterday, was the idea of new economy. The no-
tion is that to the extent that people started to be-
lieve there was a new paradigm and arguments
were being made in investment committees re-
lated to the notion of the new paradigm, the view
would be magnified by discussion. In the indi-
vidual decision literature there’s a view that a lot
of decision-making is reason based. You come
up with reasons why you prefer A over B. Well,
there’s an argument that the same thing goes on
in committees. But there are certain classes of ar-
guments that people seem to find more compel-
ling than others that build over and above what
you as an individual bring to this sort of social
interaction. I’ll give you an example of that in a
few minutes.

Voice: I was just going to say, Brad Barber and I and
Chip Heath are basically looking at that, a test of
more or less that theory with the investing clubs
and we find some evidence that the clubs seem to
buy stocks that you might have said had more ac-
ceptable attributes.

John Payne: There are certain classic arguments
that really come in here.

Voice: Yes.
Voice: I suspect, because I don’t know, I’m not on an

investment committee, that they must be orga-
nized differently, in the sense that the size of the
committee, the committee gets rewarded or not
based on the performance of the committee, wheth-
er there’s a strong chairman, the chairman rotates.
I mean these committees get organized in a lot of
different ways.

Arnold Wood: One section of the survey is on lead-
ership issues.

John Payne: Leadership and size. It’s interesting
and this is perhaps not all that surprising, the me-
dian size was 7. It was interesting and we’ll talk a
little bit about this when we talk about leadership,
the overwhelming response about what the role of
the leader was, was to seek consensus, to try to
bring people together. And a lot of strength about
majority sorts of things, which sounds really great,
but as we’ll show in some data if you’ve got a
group of people together who have biased judg-
ments, that effort to seek consensus, majority, is
just going to make that bias stronger.

Arnold Wood: 60 percent of the people who were on
committees of six or more felt they would rather
have it smaller, three to four. People liked the con-
cept of smaller committees.

John Payne: Now, before I get into the literature,
there is an important point that needs to be made
which is that you need to look at the tasks that
you’re asking groups (people) to do. There’s an
important distinction in the group literature be-
tween what are called intellectual tasks or prob-
lem-solving tasks and these are tasks where going
in we may not know what the right answer is, but if
someone comes up with the answer we all agree,
yeah, that’s right. These are sometimes called Eu-
reka problems in the literature. So you can have a
variety of people starting off with a task, you don’t
know exactly how to do it, but when someone co-
mes up with the answer most people are nodding
their heads saying yeah, that’s the right answer.

Now the interesting thing about that is that it is
really based on a shared conceptual system. So in
arithmetic we know 2 plus 2 equals 4, it’s a little
more complicated in domains like finance. But I
want to stress something here because I want to
come back to it; a shared conceptual system may
or may not be right normatively. So if you have a
shared conceptual system but it’s wrong, people
may think, yes, someone’s come up with the an-
swer, ah-ha, it’s Eureka, but it’s Eureka to the
wrong thing. Generally in this case, committees
are governed by what is called truth or truth sup-
ported wins decision schemes. So once one person

PAYNE AND WOOD

comes up an answer or one person plus another
one validates that that’s the right answer, the com-
mittee goes with it.

The other committee tasks are more judgmen-
tal or decision types of tasks, where preferences
are involved. That is, there’s no really right an-
swer, e.g., how much risk are you prepared to take
in your investment? Those tasks are generally re-
solved with some form of majority rule or strength
in proportion in support kind of process, whether
it be consensus or some variation on that. That’s
going to be important because as we talk about
how well groups do, it turns out that there’s an in-
teresting distinction between those two types of
tasks.

By the way, in looking at our investment sur-
vey, we gave people the definitions of intellectual
versus judgmental task and asked them to give us a
sense of the type of tasks they dealt with. The tasks
were investment policy, asset allocation decisions,
markets environment, manager selection review
and special issue pertaining to those specific in-
vestment decisions. Basically, they viewed these
as dealing with judgmental type of decisions
where there was no necessarily correct answer, but
there were some intellectual sorts of things and
most of the committees reported that they used
some version of majority rules.

Now, some research data. One of the arguments
is that groups will tend to do better because they’ll
check errors, etc. To illustrate, one of the classic
investment errors that people make is the sunk cost
or escalation of commitment error. To give you a
flavor of what is a typical set of results; this study
by Whyte (1993) involved giving a group of peo-
ple an investment to evaluate. The question was,
should you go ahead and invest in it or not? The
way the study had been set up was that if you just
described the forward-looking prospects of this in-
vestment, only about one-third—less than one-
third of the people thought it was worth doing, not
what you’d call an overwhelming vote for the in-
vestment option.

When they put the individuals in groups, there
was a slight tendency for the groups to go even less
with the project. However, if you then included a
of sunk cost story so you had an investment that
hadn’t worked out, but now you’ve got a chance
improve an outcome, you got a very strong indi-
vidual effect of sunk costs of the willingness to in-
vest. This is the classic escalation of commitment
effect.

What’s really interesting is look at the even
higher percentage of groups that showed the sunk
cost effect.

So here’s an example of an individual bias, es-
calation of commitment. When you have groups

make the decision, the bias doesn’t decrease, it
gets stronger. So people were much more likely to
want to go ahead with this investment with the
sunk costs story behind it than they were without
it. And the issue then became that when they did
this as a group, that effect got magnified.

Arnold Wood: This response is very intuitive to
venture capitalists. Venture capitalists come back
and said if we only had another million bucks and
we can do this, and the committee says give them
the million bucks. Let’s go.

John Payne: Groups show it even more. Now I’m
going to come back to this in a little bit, but there is
an interesting asymmetry with the group results
that I want to come back to, which is that if you
had a majority of people who were in the direction
of going with responding to the sunk costs escalat-
ing commitment, then the group just magnified
that effect. If you had a group of people who were
doing what economists teach, which is ignoring
the sunk costs, the majority tended not to do it.

But there was a little bit of an asymmetry here,
which is the likelihood that a minority would have
an impact and would actually change the opinion
of a majority was much stronger in the direction of
people who wanted to escalate commitment than
those who wanted it. And it’s to get at this point
that I’m going to stress that there may be qualities
of arguments that have an asymmetry, so an ar-
gument for why you escalate commitment was
viewed in some sense a stronger argument than ac-
tually the opposite of ignoring sunk costs.

Now, we talked an awful lot about overconfi-
dence in this meeting and I was reading a Wall
Street Journal article talking about behavioral fi-
nance and suggesting that overconfidence is per-
haps the most pervasive bias for behavioral fi-
nance and there have been some studies done
looking at groups in terms of overconfidence. One
was a study by Plous (1995) where people were
asked to estimate uncertain quantities and they
were giving confidence intervals, high-low num-
bers, and there were supposed to be 90 percent
confidence intervals on 10 items. If you look at the
number that 107 individuals got correct in this par-
ticular study, it was 3.1 out of 10; a classic over-
confidence phenomenon.

Interestingly, groups actually did better. So
they get 4.2 out of 10. Still what you might argue is
substantial overconfidence, but they’re getting
more of them right. Now, in talking about group
behavior, one common comparison is groups ver-
sus how individuals do on average. There is an-
other statistic that people who do this research
such as Gigone and Hastie (1997) suggest we
should be looking at which is what are called sta-
tistical groups. So the idea here is you take your

INDIVIDUAL DECISION MAKING AND GROUP DECISION PROCESSES

individual judgments, you form a response just by
taking, for example, the average of a number that’s
equal to the size of the group. So the group is size
four, you take four opinions and just take the aver-
age, and that gives you in some sense a baseline of
what it means just to aggregate individual opin-
ions without any face-to-face discussion at all.

An example of this that was mentioned yester-
day is consensus forecasting. A lot of consensus
forecasts, as I understand, are basically earnings
forecasts taken together and then averaged. And it
was interesting in this study that if you had just
taken these individual opinions and statistically
aggregated them, you would have gotten 7.4 out of
10 correct. That’s not an uncommon finding, that
face-to-face meetings may improve things, but
they’re still often worse than you would have been
doing without the meeting at all. Just taking the in-
dividual opinion.

Now there’s one other thing I want to stress
here. They asked these people, well, how well do
you think you’re going to do? How many do you
think you’re going to get right? What the individu-
als said was that they were going to get as individ-
uals about 5.6 out of 10 correct. Now they got 3.1,
so you can take the difference and not doing as
well as they thought they were going to be doing.
Then they asked them how do you think the group
is going to be doing. The answer, on average, was
7.5 out of 10 correct. Again, I ask you to compare
that number to the actual number of 4.2 correct
that was achieved. It’s really this idea that groups
may do better, but people often think they’re going
to do a lot better than they, in fact, do.

Now I’m going to throw out a speculation here.
If groups and our investment survey suggest this
effect, namely that it increases your confidence
and may or may not increase your accuracy equal-
ly well, then an interesting question is to take the
work that Terry’s done and others about the rela-
tionship between confidence and trading volume
and examine if there might be some relationship in
terms of the amount of trading you see by invest-
ment committees.

Voice: Just a quick question. So the response is ei-
ther 5.6 or 7.5. I mean theoretically wouldn’t we
expect the answer to be 90 percent?

John Payne: People when asked a more statistical
question tend to pool across 10 as opposed to 90
percent for individual items and you get this kind
of pattern. What’s interesting was the very strong
sense that by being part of a group, they’re going
to do that much better. I think one of the reasons
why we see so many investment committees being
formed is that we have a belief that groups are go-
ing to be just that much more better. In our invest-
ment survey, when we asked people what do you

think the probability of making a correct decision
was, and it ranged from 55 to 90 percent. Ba-
sically, 75 percent of the respondents thought that
their committee would have more confidence in
their decisions than an individual, which is consis-
tent with the prior research. As I mentioned, I
think one interesting question would be to actually
look at investment committee confidence and re-
late that to things like trading volume and so on.

Arnold Wood: And manager turnover.
John Payne: Next, when we ask people to report

how they behaved in the investment committees
and how much information sharing there was and
how much sort of persuasion, most of them re-
sponded said, we do information sharing. I happen
to believe that part of that is a socially correct re-
sponse. Sharing sounds better than persuading,
but they mentioned a lot of information sharing.
So an interesting question is how well are we shar-
ing? What are we sharing?

I’ve got two studies I want to mention in
terms of that. One is one that just recently came
out by Schulz-Hardt et al. (2000). An old and
very strong effect in the individual decision liter-
ature deals with a confirmation bias. So you have
an initial opinion, you can acquire new informa-
tion. What kind of information do you acquire,
information that supports that initial opinion or
information that might conceivably be arguing
the other side?

Well, looking at an individual, you see a lot of
evidence of what is called a confirmation bias.
That is, when people have an option to choose ei-
ther one and there’s equal numbers of confirming
or conflicting, they tend to choose more support-
ing information than conflicting information.
Again, let’s look at what happens with groups.
This bias doesn’t go away and it doesn’t get
weaker. In fact, it gets stronger. So you get as
much information being acquired, but a propor-
tionately larger percentage of that information
tends to be of a confirmation effect. And this effect
gets even stronger the larger the initial proportion
of people in favor of a position. There’s some that
suggest that if you have a strong leader of a group
who expresses an initial opinion, then you get a lot
of sort of confirming kinds of activities.

Arnold Wood: I was once an analyst who covered
the auto companies. I went through a presentation
and a chairman looked at me and he said, “Mr.
Wood this is a great report.” He then said, “My
wife drives a Ford and it’s in the shop all the time. I
don’t think we should put this on the list.” And
guess what the next person said? Gee, you know,
Ford’s having trouble with the European division
and it just got on a roll. I went out of there with my
tail between my legs and I learned about commit-

PAYNE AND WOOD

tees and leadership at that point and the role of
chairmen at that point.

David Dreman: And if there’s a tilt like we have
more recently, a very strong tilt, a lot of the com-
mittees will go the same way. They see that Gold-
man is doing this and, therefore, Shearson’s peo-
ple will probably be doing the same and First
Boston and so forth. So I think there’s an enor-
mous amount of re-enforcement of decision-mak-
ing because of the interaction among people.

Arnold Wood: Sponsorship.
John Payne: One of my favorite findings in the

group literature is called the common versus
unique knowledge issue in sharing by Stasser and
his colleagues. Basically, to just give you a sense
of this, imagine that you are trying to select a fund
manager as part of the investment committee and
you have information on different candidates for
this job. Some of that information is positive and
some of that information is negative. It is positive
in the sense of a suggestion this would be the right
candidate and negative suggesting that it wouldn’t
be. Some is just neutral and doesn’t have a strong
impact one way or the other.

In one study, they had three candidates here and
they set it up so candidate A had eight positive,
four neutral and four negative [see Table 1]. And
these were the numbers for the other two candi-
dates. So when you add up all the information, it’s
pretty clear which candidate you ought to select as
A. In fact, groups did decide on A. Then the re-
searchers set it up so they took the groups and gave
one member patterns that looked like this, whether
it be two positive to candidate David, four neutral
and four negative. For candidate Terry, a different
pattern of information would be given to a subject
but it would be a two positive for A, but it would be
a different two than were used to describe candi-
dates David and Terry. The point being that all the

information was in the heads of four people, it’s
just that some people had some parts of it and oth-
ers had other part of the information. Now if you
took all that information and you put it out on the
table, you’d be back here selecting candidate A.
What happened though was in this unshared situa-
tion, because they’d set it up so that in this case B
had four positives for most people and one nega-
tive, now that looks better, four to one for candi-
date B. So, in fact, the majority of the committee
responses were to go with candidate B.

Now, this is really interesting because the po-
tential of having all the information was there. Ev-
erybody had it and if they had fully shared it, both
the common information and the unique informa-
tion, they would have chosen A, but they didn’t.
There’s an interesting argument here in terms of
investment committees where people tend to start
off in a lot of situations sharing information that
other people have.

Now part of that is a confirmatory bias, so people
were walking in thinking B was the right answer, so
they were confirming that by giving the informa-
tion about B. But there’s some recent literature to
suggest that it’s also a sort of the enhancing effect
with people who are part of a committee. You go on
a committee and one of the things you’re trying to
do is to make yourself look good. You’ve got two
choices of information to share with the committee.
One piece of information is information that others
like and have and believe or you can share informa-
tion that’s sort of out from left field that no one else
has. Which do you do?

Well, there’s evidence that suggests that what
you do is you tend to start off, at least initially,
with information that other people already have
and it’s a form of getting status in the group. So if
everybody believes or if some people already be-
lieve Ford is not a good investment, yeah, I got
some other information about Ford that would
suggest it’s not a particularly good investment. It
makes me look better.

Let me summarize here with an old idea in
psychometrics. That is the idea that if you think
about a judgment like an earnings per share or the
prospects for Ford, you can break down the judg-
ment into three components. One component is
the truth (validity) part of your judgment regard-
ing earnings per share. Another component is the
one you see in almost all statistical models, ran-
dom error, and noise. And then third component is
another type of error; let’s call it bias, systematic
error in one direction, overconfidence, etc. What’s
interesting is that if this bias component is rela-
tively small so your main source of error is just
noise or if there is bias and it’s actually only held
by a minority of members, then it turns out groups

INDIVIDUAL DECISION MAKING AND GROUP DECISION PROCESSES

Table 1. Task—Select the Most Preferred of 3 Job
Candidates; Information—Positive, Neutral and Negative;
Groups—4 Persons With Shared or Unshared Information

Candidate

A B C

Shared information
Positive 8 4 4
Neutral 4 8 8
Negative 4 4 4
Choice % .83 .11 .06

Unshared information
Positive 2* 4 1
Neutral 4 5 8
Negative 4 1 1
Choice % .18 .62 .20

Note: Across the group all 8 pieces of information were held by the
group. Adapted from Stasser & Titus, 1985.

are going to help you and they’re going to help you
for no other reason than statistical law of large
numbers. They’re going to be canceling out this
random error.

But if you’re talking about judgment tasks
where you have reason to believe that bias is sub-
stantial and particularly if that bias is likely to be
shared by a majority or more of a committee, then
groups do not necessarily improve matters (judg-
ments). And so, Aaron, when I was talking with
you, the idea that once you get a concept like the
new economy or a new paradigm shared by a major-
ity of the group, whether it’s right or wrong, then
what happens is the group effect amplifies that bias.

So in thinking about when groups are going to
do well and when they’re not, the key is to decide
how much of what you’re going to see in judgment
is driven by this random error component versus
this bias component. If a lot of it is bias and not
random error, in the sense of noise, don’t count on
groups to fix it.

Now, I will go through this last study a little
fast, however, I think it is an important group pro-
cess result. David Schkade and others (2000) have
been involved in studies dealing with judgments
about punitive damages. In a recent study they had
over 500 juries formed of size six. A huge sample.
What the researchers did is they looked at the deci-
sion whether to award punitive damages how
much they would be. And they found a very com-
mon kind of majority rule in terms of whether to
award it.

They also found that when they asked people to
rate how much punishment the defendants should
suffer, you got what’s called a polarization effect,
so group decisions tended to either increase high
numbers or lower low numbers. But what I really
want to stress is this last result. They found what
they call a severity shift. So if they compared what
the sort of statistical results would have been
knowing what people started off thinking about
what should be the right amount to what happened
at the end of group deliberation, they found that
actually the punitive amounts people generated af-
ter the group deliberation were more severe. If the
group started off with a high number, it got a lot
higher after group deliberation.

What the authors of this study suggest is that in
this kind of domain, arguments for punishment
tended to have a rhetorical advantage. People who
were making that argument were viewed as mak-
ing stronger arguments, better arguments than peo-
ple who were arguing in the other direction. In
fact, in the study they measured how easy it would
be to make a higher or lower kind of thing and
found data supporting this sort of notion. The idea
is that while a lot of group behavior can be viewed

as just sort of a mapping of individuals into a col-
lection, majority ruled and so on. There are things
that happened in face-to-face meetings that will
have to do with arguments being shared.

Further, not all arguments are created equal.
Certain arguments tend to have an advantage. In
punitive damage award cases, arguments for pun-
ishment may have the advantage. It’s interesting in
criminal cases, there’s a leniency norm in this
country. So an argument of not punishing, not con-
victing, tends to have a special status. A question
to consider for those of you who have served on in-
vestment committees and have been part of these
meetings is whether or not there are certain classes
of arguments that may have been made, say, in the
last couple of years in the bubble and so on, that
tend to have this kind of rhetorical advantage?

So the argument is that we’re in a new para-
digm, new economy, one that sounds like it might
have a big advantage over value investing in these
kinds of settings, particularly where you’ve got
more than half the group buying into it.

Voice: Does that suggest that larger groups would be
more prone to fire under performing managers, for
example?

John Payne: Yes—let me rephrase that. I think that
groups that tend to be more likely to strive for con-
sensus are more likely to do that because that con-
sensus is going to be more based on the quality of
argument.

Arnold Wood: They’re certainly more prone to. On
the other side of this, if your allocation is 60 per-
cent to stocks and you get to 80, but you had this
10 percent bumper, people don’t go back. They get
to the 80 and they’ll stay there. It’s an amazing
thing to watch. They just won’t open the book on
what the guidelines were.

John Payne: Let me summarize because I know
we’re getting close to the ending time. Groups can
do well, particularly well, when we’re talking
about intellectual tasks where once you find the
right answer, everybody can agree that that’s true.
An interesting question is whether or not you can
occasionally get errors in intellectual tasks where
what you have is a mistake in shared mental model
of a situation. People may think that they’re doing
an intellectual task. They think they’ve found an
answer consistent with their mental model of the
situation and they go with it. They are also very
confident with the answer, but they are really mak-
ing a reasoning error.

In judgment tasks, groups show all the biases
that we have talked about. Part of the reason for
less than optimal group performance seems to be
poor sharing and confirmation bias in information
acquisition. Social loafing might also contribute to
poor information use. Again, groups don’t neces-

100

PAYNE AND WOOD

sarily mitigate attitudes. They can reinforce them.
You can get group polarization effect. Groups tend
to reinforce shared beliefs. So if there’s shared be-
liefs about leniency in criminal cases, groups will
likely exhibit that even stronger than an individ-
ual. If there’s shared beliefs about punitive dam-
ages, that becomes even stronger with groups.
Groups also feel very confident in their decisions.

Now, when I was asked to do this talk, I was
given a title, which dealt with optimizing invest-
ment decisions. So lastly, I would like to offer some
optimizing suggestions for investment committees.

First, in selecting members of an investment
committee, diversity of information and attitudes
is much more important than numbers. A four-per-
son committee properly selected to have low cor-
relation is a much better thing than a much bigger
one. Second, information sharing doesn’t happen
automatically. You need to manage that as an ac-
tive process. One of the most important things a
leader can do in an investment committee is to
manage the information-sharing process. For ex-
ample, one of the things that can help overcome
the failure to share unique information is to start
off by making sure you identify the fact that peo-
ple are in the room because they’re expected to
have differential expertise and bring that to bear
on solving investment problems.

Arnold Wood: A leader has to deputize, virtually
deputize people, say, go out of the room and come
back and tell us why this is a lousy idea. That was
done in the Bay of Pigs, by the way.

John Payne: Third, do not count on groups to cor-
rect for systematic bias. If you want to correct for
systematic bias, my suggestion is to concentrate
on training individuals using some of the tech-
niques that Baruch (Fischhoff) and others have
done to avoid some of these biases. If you try to
wait for the group to correct judgment bias, that’s
not going to happen.

Fourth, one of the things that groups can do is
they can error check, not on results, but on the de-
cision process. So if you can get the groups agree-
ing on what defines a good decision-making pro-
cess, like ignoring sunk costs or incorporating
base rate information, one thing the group mem-
bers can do with each other is to hold each other
accountable for the process by which the decision
is made.

The last point, most, I want to make is that the
process loss effects with groups are very strong
psychological effects. So you can talk about
them in a committee, you can get everybody
nodding, but then if you don’t keep working at
it, the tendency is to revert back to those biased
ways of processing information by groups. The
processes of group decision-making require con-
tinuous effort and attention for there to be
improvement.

Arnold Wood: John, thank you very much. We just
started the survey at the end of April. We sent it out
to about 130 people. It’s a rather extensive survey,
we got 13 back and I understand there are 23 sit-
ting on e-mail right now, new ones, fresh data.

101
INDIVIDUAL DECISION MAKING AND GROUP DECISION PROCESSES

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Mental Accounting and Consumer Choice
Thaler, Richard H
Marketing Science; Jan/Feb 2008; 27, 1; ProQuest Central
pg. 15

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

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