Teams Make Better Decisions Than Individuals

Teams clearly outperform individuals in economic decision-making. That is the key result of a laboratory study by Professors Martin Kocher and Matthias Sutter, published in the Economic Journal.

The two researchers show that the type of the decision-maker – an individual or a team – makes a significant difference in an interactive economic environment, whether it's the investment and marketing strategies of companies and fund managers or the budget and monetary policy-making of governments and central banks. Small teams are smarter decision-makers than individuals because they are better at processing information and better at predicting other decision-makers'' choices. The growing importance of teams in firms, consulting and decision-making in general renders these findings highly relevant. Decision-making teams are everywhere, including families, boards of directors, legislatures and committees. Households and firms, the main players in the economy, are typically not individuals but teams of people with a joint stake in their decisions. Similarly, political and military decisions as well as decisions on monetary policy are frequently taken by teams rather than by individuals.

In the laboratory setting that the researchers used to study the differences in decision-making between small teams and individuals, there are four decision-makers. Each of them can choose a number between (and including) zero and 100. The winner of the game is the decision-maker with the number that is closest to two-thirds of the average of the four chosen numbers. The game is repeated four times. Despite its simplicity, this so-called ''beauty-contest'' or ''guessing'' game captures important features of investment decisions in financial markets (as was first noted by John Maynard Keynes). In the game as well as in financial markets, investors have to make guesses about other investors'' views – whether they value a given asset high or low and what they think about the future value of the asset.

In order to win in the experiment, it is not enough to know that the game''s ultimate outcome (its ''equilibrium'') is for all decision-makers to choose zero, but decision-makers have to form expectations about the decisions of others. Kocher and Sutter find that teams (consisting of three people) are much better at guessing what other decision-makers do in this game. In their experiment, teams win the game about 80% more often than individuals in cases where small teams compete against individuals. When teams compete against teams and individuals against individuals, Kocher and Sutter find that teams converge much faster to the game''s equilibrium (of choosing zero) than individuals (see Figure 1 below). They explain these findings by the advantageous information processing capacity of teams, which leads teams to grasp the dynamics of the game much faster and to form more accurate expectations about the behaviour of other decision-makers. Hence, teams are more appropriate decision-makers for important decisions in interactive settings.

The basic pattern of the results by Kocher and Sutter can be applied to many team decisionmaking situations, although their setting bears a special resemblance to financial markets. One important practical implication of their research is that key decisions in an interactive economic environment at the company level (such as investment or marketing strategies) as well as at the macroeconomic level (such as monetary policy or the budget) should be taken by teams rather than by individuals.

Although these findings might seem obvious, they are surprising when compared with scientific knowledge from other disciplines. Psychological research, for example, concludes that team discussion tends to attenuate, amplify or simply reproduce the judgmental biases of individuals. Whether this unsatisfying conclusion carries over to interactive economic tasks has now been answered by Kocher and Sutter.

''The Decision Maker Matters: Individual versus Group Behaviour in Experimental Beauty-contest Games'' by Martin Kocher and Matthias Sutter is published in the January 2005 issue of the Economic Journal. Kocher is at the University of Innsbruck; Sutter is at the Max Planck Institute for Research into Economic Systems Jena.