Peer effects on risk behaviour: the importance of group identity

Francesca Gioia

doi:10.1007/s10683-016-9478-z

Abstract

This paper investigates whether and to what extent group identity plays a role in peer effects on risk behaviour. We run a laboratory experiment in which different levels of group identity are induced through different matching protocols (random or based on individual painting preferences) and the possibility to interact with group members via an online chat in a group task. Risk behaviour is measured by using the Bomb Risk Elicitation Task and peer influence is introduced by giving subjects feedback regarding group members’ previous decisions. We find that subjects are affected by their peers when taking decisions and that group identity influences the magnitude of peer effects: painting preferences matching significantly reduces the heterogeneity in risk behaviour compared with random matching. On the other hand, introducing a group task has no significant effect on behaviour, possibly because interaction does not always contribute to enhancing group identity. Finally, relative riskiness within the group matters and individuals whose peers are riskier than they are take on average riskier decisions, even when controlling for regression to the mean.

Highlights

The question of whether and how peers influence an individual’s behaviour has been widely investigated in economics literature
We find that when interaction in the group task contributes to the enhancing of group identity, the magnitude of peer effects on risk behaviour does increase in comparison with the painting treatment
We study whether and to what extent group identity affects the magnitude of peer effects on an individual’s risk behaviour

Summary

Introduction

The question of whether and how peers influence an individual’s behaviour has been widely investigated in economics literature. Peer effects have often been mentioned as a leading explanation for why people engage in risk taking activities such as smoking (Alexander et al 2001), drug and alcohol use (Fergusson et al 2002; Duncan et al 2005; Powell et al 2005; Lundborg 2006; Clark and Loheac 2007), criminal activity (Fergusson et al 2002; Bayer et al 2009), financial decisions (Kelly and O’Grada 2000; Hong et al 2004; Brown et al 2008; Bursztyn et al 2014; Cai et al 2015) and entrepreneurship decisions (Nanda and Sørensen 2010; Falck et al 2012; Lerner and Malmendier 2013) Despite their relevance for many social and economic interactions, little is known about the circumstances triggering peer effects. We hypothesize that the sense of belonging to a social group may affect the realization and magnitude of peer effects

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