Social interaction effects: The impact of distributional preferences on risky choices

Anita Gantner,Rudolf Kerschbamer

doi:10.1007/s11166-018-9275-5

Abstract

This paper identifies convex distributional preferences as a possible cause for the empirical observation that agents belonging to the same group tend to behave similarly in risky environments. We first show theoretically that convex distributional preferences imply social interaction effects in risky choices in the sense that observing a peer choose a risky (safe) option increases the agent’s incentive to choose the risky (safe) option as well, even when lotteries are stochastically independent and the agent can only observe the lottery chosen by the peer but not the corresponding outcome. We then confirm our theoretical predictions experimentally.

Highlights

People mostly act in social contexts rather than in isolation, and social comparison is typically part of an individual’s decision making process
We conclude that social interaction effects caused by convex distributional preferences are a plausible source for the observed correlation between the risky choices of decision maker (DM) and their peers in the aggregate data
Proposition 2 contains our main theoretical result regarding social interaction effects. It states that convex distributional preferences imply social interaction effects in risky choices in the sense that observing a peer choose a risky option increases the agent’s incentive to choose the risky option as well, even when lotteries are stochastically independent and the agent can only observe the lottery chosen by the peer but not the corresponding outcome

Summary

Introduction

People mostly act in social contexts rather than in isolation, and social comparison is typically part of an individual’s decision making process. Social comparison might affect decision making in risky environments, it is a core element of some prominent models of distributional preferences.. For altruism (Becker 1974; Andreoni and Miller 2002), surplus maximization (Engelmann and Strobel 2004), spite (Levine 1998) and concerns for relative income (Duesenberry 1949), which may be modeled without any reference to social comparison, there is ample empirical evidence indicating that social comparison influences behavior. Convexity here refers to the property that a DM’s benevolence toward another individual increases (or that malevolence decreases) as the income of the other individual decreases along an indifference curve, and its strict incarnation obviously calls for social comparison.

Methods

Results

Conclusion