nep-upt New Economics Papers
on Utility Models and Prospect Theory
Issue of 2023‒02‒27
twenty papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Smoothing Spline Method for Measuring Prospect Theory Components By Yao Thibaut Kpegli
  2. Three layers of uncertainty By Ilke AYDOGAN; Loïc BERGER; Valentina BOSETTI; Ning LIU
  3. Age-Dependent Risk Aversion: Re-evaluating Fiscal Policy Impacts of Population Aging By Phitawat Poonpolkul
  4. Matching Function Equilibria with Partial Assignment: Existence, Uniqueness and Estimation By Liang Chen; Eugene Choo; Alfred Galichon; Simon Weber
  6. Stable and Extremely Unequal By Alfred Galichon; Octavia Ghelfi; Marc Henry
  7. Fair Earnings Tax Reforms By Erwin Ooghe; Erik Schokkaert; Hannes Serruys
  8. Willingness to Accept, Willingness to Pay, and Loss Aversion By Jonathan Chapman; Mark Dean; Pietro Ortoleva; Erik Snowberg; Colin Camerer
  9. Large Compound Lotteries By Zvi Safra; Uzi Segal
  10. Conditional generalized quantiles based on expected utility model and equivalent characterization of properties By Qinyu Wu; Fan Yang; Ping Zhang
  11. Utility-based indifference pricing of pure endowments in a Markov-modulated market model By Alessandra Cretarola; Benedetta Salterini
  12. The impact of surplus sharing on the outcomes of specific investments under negotiated transfer pricing: An agent-based simulation with fuzzy Q-learning agents By Christian Mitsch
  13. Multivariate risk preferences in the quality-adjusted life year model By Arthur E. Attema; Jona J. Frasch; Olivier L’haridon
  14. Robust Bayesian Choice By Lorenzo Stanca
  15. On the marginal utility of fiat money: insurmountable circularity or not? By Reiss, Michael
  16. Mind the framing when studying social preferences in the domain of losses By Armenak Antinyan; Luca Corazzini; Miloš Fišar; Tommaso Reggiani
  17. "Exploring Factors Affecting the Mobile Commerce Adoption Among University Students in Malaysia " By Nurul Labanihuda Abdull Rahman
  18. The congested assignment problem By Anna Bogomolnaia; Herve Moulin
  19. Wealth distribution and household economies of scale: Do families matter for inequality? By Severin Rapp
  20. Informational Diversity and Affinity Bias in Team Growth Dynamics By Hoda Heidari; Solon Barocas; Jon Kleinberg; Karen Levy

  1. By: Yao Thibaut Kpegli (Univ Lyon, Université Lyon 2, GATE UMR 5824, F-69130 Ecully, France)
    Abstract: Prospect theory is today the main descriptive model for decision making under risk and uncertainty. Measurement methods of its components are key to many behavioral applications. This paper presents a smoothing spline method for measuring utility function, weighting function and loss aversion. The method is nonparametric and includes a penalty term to control the collinearity between the value and the weighting functions. It is applicable to both risk and uncertainty. We apply the method to individual data of Tversky and Kahneman (1992) and Gonzalez and Wu (1999). In line with original prospect theory, the probability weighting function is not sign-dependent. The value function is S-shaped with a loss aversion coefficient of 1.6.
    Keywords: prospect theory, risk attitudes elicitation, smoothing spline
    Date: 2023
  2. By: Ilke AYDOGAN (IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Economie Management, F-59000 Lille, France; and iRisk Research Center on Risk and Uncertainty); Loïc BERGER (CNRS, Univ. Lille, IESEG School of Management, UMR 9221 - LEM - Lille Economie Management, F-59000 Lille, France; iRisk Research Center on Risk and Uncertainty; RFF-CMCC European Institute on Economics and the Environment (EIEE), and Centro Euro-Mediterraneo sui Cambiamenti Climatici, Italy); Valentina BOSETTI (Department of Economics and IGIER, Bocconi University, and RFF-CMCC European Institute on Economics and the Environment (EIEE), Centro Euro-Mediterraneo sui Cambiamenti Climatici, Italy); Ning LIU (School of Economics and Management, Beihang University and Laboratory for Low-carbon Intelligent Governance, Beihang University, China)
    Abstract: We explore decision-making under uncertainty using a framework that decomposes uncertainty into three distinct layers: (1) risk, which entails inherent randomness within a given probability model; (2) model ambiguity, which entails uncertainty about the probability model to be used; and (3) model misspecification, which entails uncertainty about the presence of the correct probability model among the set of models considered. Using a new experimental design, we isolate and measure attitudes towards each layer separately. We conduct our experiment on three di?erent subject pools and document the existence of a behavioral distinction between the three layers. In addition to providing new insights into the underlying processes behind ambiguity aversion, we provide the first empirical evidence of the role of model misspecification in decision-making under uncertainty.
    Keywords: : Ambiguity aversion, model uncertainty, model misspecification, non-expected utility, reduction of compound lotteries
    JEL: D81
    Date: 2022–11
  3. By: Phitawat Poonpolkul
    Abstract: The integration of age-dependent increasing risk aversion (IRA) into an overlapping generations model (OLG) with risk-sensitive preferences provides a more comprehensive understanding of risk aversion, life-cycle behavior, and welfare under uncertainties. A quantitative analysis shows that IRA individuals accumulate more precautionary savings and adjust working hours to mitigate income shocks. However, this mitigation of uncertainty entails a cost of reduced resources, which could have otherwise been used to increase overall consumption of goods and leisures. Three alternative policies to address the challenges posed by aging are evaluated: increasing a payroll tax rate, reducing pension benefits, and extending the retirement age. The results show that individuals who expect to become more risk averse in old age may prefer the payroll tax rate increase, as the other two options results in relatively higher income uncertainty, which contradicts the results of previous studies that assumed constant risk aversion (CRA).
    Keywords: Overlapping generations model; Fiscal sustainability; Demographic changes; Increasing risk aversion; Non-expected utility
    JEL: D15 D81 E62 J11
    Date: 2023–02
  4. By: Liang Chen (Wuhan University [China]); Eugene Choo (Yale-NUS College); Alfred Galichon (NYU - NYU System, CIMS - Courant Institute of Mathematical Sciences [New York] - NYU - New York University [New York] - NYU - NYU System, ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Simon Weber (University of York [York, UK])
    Abstract: In this paper, we argue that models coming from a variety of fields share a common structure that we call matching function equilibria with partial assignment. This structure revolves around an aggregate matching function and a system of nonlinear equations. This encompasses search and matching models, matching models with transferable, non-transferable and imperfectly transferable utility, and matching with peer effects. We provide a proof of existence and uniqueness of an equilibrium as well as an efficient algorithm to compute it. We show how to estimate parametric versions of these models by maximum likelihood. We also propose an approach to construct counterfactuals without estimating the matching functions for a subclass of models. We illustrate our estimation approach by analyzing the impact of the elimination of the Social Security Student Benefit Program in 1982 on the marriage market in the United States.
    Keywords: Matching function, Maximum likelihood estimation, Counterfactuals, Matching, Transferable utility, Imperfectly transferable utility
    Date: 2021–02–04
  5. By: Ilke AYDOGAN (IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Economie Management, F-59000 Lille, France; and iRisk Research Center on Risk and Uncertainty); Loïc BERGER (CNRS, Univ. Lille, IESEG School of Management, UMR 9221 - LEM - Lille Economie Management, F-59000 Lille, France; iRisk Research Center on Risk and Uncertainty; RFF-CMCC European Institute on Economics and the Environment (EIEE), and Centro Euro-Mediterraneo sui Cambiamenti Climatici, Italy); Valentina BOSETTI (Department of Economics and IGIER, Bocconi University, and RFF-CMCC European Institute on Economics and the Environment (EIEE), Centro Euro-Mediterraneo sui Cambiamenti Climatici, Italy)
    Abstract: We report the results of two experiments designed to better understand the mechanisms driving decision-making under ambiguity. We elicit individual preferences over different sources of uncertainty (risk, compound risk, model ambiguity, and Ellsberg ambiguity), which entail different degrees of complexity, from subjects with different sophistication levels. We show that (1) ambiguity aversion is robust to sophistication, but the strong relationship that has been previously reported between attitudes toward ambiguity and compound risk is not. (2) Ellsberg ambiguity attitude can be partly explained by attitudes toward complexity for less sophisticated subjects, but not for more sophisticated ones. Overall, and regardless of the subject’s sophistication level, the main driver of Ellsberg ambiguity attitude is a specific treatment of unknown probabilities. These results leave room for using ambiguity models in applications with prescriptive purposes.
    Keywords: : Ambiguity aversion, reduction of compound risk, model uncertainty, complexity
    JEL: C91 C93 D81
    Date: 2023–01
  6. By: Alfred Galichon (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, NYU - NYU System); Octavia Ghelfi (NYU - NYU System); Marc Henry (Penn State - Pennsylvania State University - Penn State System)
    Abstract: We highlight the tension between stability and equality in non transferable utility matching. We consider many to one matchings and refer to the two sides of the market as students and schools. The latter have aligned preferences, which in this context means that a school's utility is the sum of its students' utilities. We show that the unique stable allocation displays extreme inequality between matched pairs.
    Date: 2021–08–17
  7. By: Erwin Ooghe; Erik Schokkaert; Hannes Serruys
    Abstract: We characterize a measure of social welfare for linear production economies in which individuals differ in productive skills and preferences. The key feature of our measure is that it aggregates fairness gaps, defined as the difference between the money-metric utility that the individual currently obtains and the money-metric utility that the individual should obtain in a fair society. Social welfare depends on two normative parameters: society’s aversion to unfairness and the degree to which society wants to compensate individuals for productivity differences. The latter parameter makes it possible to accommodate a whole range of ethical perspectives, from libertarianism to resource-egalitarianism. As an illustration, we use our social welfare measure to evaluate four hypothetical earnings tax reforms for Belgian singles. The degree of compensation for productivity differences turns out to be the most important normative choice for the overall evaluation, while allowing for involuntary unemployment is the most important empirical choice.
    Keywords: fairness, money-metric utility, excess burden, unfair inequality, earnings tax reforms, involuntary unemployment
    JEL: D30 D60 D70 H20 I30 J20
    Date: 2023
  8. By: Jonathan Chapman; Mark Dean; Pietro Ortoleva; Erik Snowberg; Colin Camerer
    Abstract: We use four incentivized representative surveys to study the endowment effect for lotteries in 4, 000 U.S. adults. We replicate the standard finding of an endowment effect—the divergence between Willingness to Accept (WTA) and Willingness to Pay (WTP), but document three new findings. First, we find little evidence that the endowment effect is related to loss aversion for risky prospects, counter to predictions of popular theories in economics. Second, WTA and WTP not only diverge, but are, at best, weakly correlated. Third, WTA and WTP strongly relate to other aspects of risk preferences. The structure of these behaviors points to different theories of the endowment effect.
    Keywords: Willingness To Pay, Willingness to Accept, endowment effect, loss aversion
    JEL: C90 D81 D91
    Date: 2023
  9. By: Zvi Safra (Warwick Business School); Uzi Segal (Boston College)
    Abstract: Extending preferences over simple lotteries to compound (two-stage) lotteries can be done using two different methods: (1) using the Re- duction of compound lotteries axiom, under which probabilities of the two stages are multiplied; (2) using the compound independence ax- iom, under which each second-stage lottery is replaced by its certainty equivalent. Except for expected utility preferences, the rankings in- duced by the two methods are always in disagreement and deciding on which method to use is not straightforward. Moreover, sometimes each of the two methods may seem to violate some kind of first order stochastic dominance. In this paper we demonstrate that, under some conditions, the disagreement disappears in the limit and that for (al- most) any pair of compound lotteries, the two methods agree if the lotteries are replicated sufficiently many times.
    Keywords: Reduction of compound lotteries axiom, compound independence axiom, duplicated lotteries
    JEL: D81
    Date: 2021–04–28
  10. By: Qinyu Wu; Fan Yang; Ping Zhang
    Abstract: As a counterpart to the (static) risk measures of generalized quantiles and motivated by Bellini et al. (2018), we propose a new kind of conditional risk measure called conditional generalized quantiles. We first show their well-definedness and they can be equivalently characterised by a conditional first order condition. We also discuss their main properties, and, especially, We give the characterization of coherency/convexity. For potential applications as a dynamic risk measure, we study their time consistency properties, and establish their equivalent characterizations among conditional generalized quantiles.
    Date: 2023–01
  11. By: Alessandra Cretarola; Benedetta Salterini
    Abstract: In this paper we study exponential utility indifference pricing of pure endowment policies in a stochastic-factor model for an insurance company, which can also invest in a financial market. Specifically, we propose a modeling framework where the hazard rate is described by an observable general diffusion process and the risky asset price evolves as a jump diffusion affected by a continuous-time finite-state Markov chain representing regimes of the economy. Using the classical stochastic control approach based on the Hamilton-Jacobi-Bellman equation, we describe the optimal investment strategies with and without the insurance derivative and characterize the indifference price in terms of a classical solution to a linear PDE. We also provide its probabilistic representation via an extension of the Feynman-Kac formula show that it satisfies a final value problem. Furthermore, we also discuss the indifference price for a portfolio of insurance policies and for a term life insurance. Finally, some numerical experiments are performed to address sensitivity analyses.
    Date: 2023–01
  12. By: Christian Mitsch
    Abstract: This paper focuses on specific investments under negotiated transfer pricing. Reasons for transfer pricing studies are primarily to find conditions that maximize the firm's overall profit, especially in cases with bilateral trading problems with specific investments. However, the transfer pricing problem has been developed in the context where managers are fully individual rational utility maximizers. The underlying assumptions are rather heroic and, in particular, how managers process information under uncertainty, do not perfectly match with human decision-making behavior. Therefore, this paper relaxes key assumptions and studies whether cognitively bounded agents achieve the same results as fully rational utility maximizers and, in particular, whether the recommendations on managerial-compensation arrangements and bargaining infrastructures are designed to maximize headquarters' profit in such a setting. Based on an agent-based simulation with fuzzy Q-learning agents, it is shown that in case of symmetric marginal cost parameters, myopic fuzzy Q-learning agents invest only as much as in the classic hold-up problem, while non-myopic fuzzy Q-learning agents invest optimally. However, in scenarios with non-symmetric marginal cost parameters, a deviation from the previously recommended surplus sharing rules can lead to higher investment decisions and, thus, to an increase in the firm's overall profit.
    Date: 2023–01
  13. By: Arthur E. Attema (Erasmus School of Health Policy and Management |Rotterdam]); Jona J. Frasch (Erasmus School of Health Policy and Management |Rotterdam]); Olivier L’haridon (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The interest in multivariate and higher-order risk preferences has increased. A growing body of literature has demonstrated the relevance and impact of these preferences, but for health the evidence is lacking. We measure multivariate and higher-order risk preferences for quality of life (QoL) and longevity, the two attributes of the Quality-Adjusted Life Year (QALY) model. We observe preferences for a positive correlation between these attributes and for pooling together a fixed loss in one of the attributes and a mean-zero risk in the other, and for pooling together mean-zero risks in QoL and longevity. The findings indicate that higher-order risk preferences are stronger for health than for money. Furthermore, we test if preferences for a risky treatment for a disease affecting only QoL, depend on life expectancy. We find no such a relation, but there is a positive relation between riskiness of a comorbidity affecting life expectancy and risk aversion for a QoL treatment. We therefore observe no definitive deviation from the QALY model, although the model is more robust when expected longevity is high. Our findings suggest that the current practice of cost-effectiveness analysis should be generalized to account for risk aversion in QoL and longevity, and higher-order preferences.
    Keywords: comorbidities, correlation attitude, prudence, QALYs, risk apportionment, risk aversion, temperance, treatment intensity
    Date: 2022–02
  14. By: Lorenzo Stanca
    Abstract: A major concern with Bayesian decision making under uncertainty is the use of a single probability measure to quantify all relevant uncertainty. This paper studies prior robustness as a form of continuity of the value of a decision problem. It is shown that this notion of robustness is characterized by a form of stable choice over a sequence of perturbed decision problems, in which the available acts are perturbed in a precise fashion. Subsequently, a choice-based measure of prior robustness is introduced and applied to portfolio choice and climate mitigation.
    Keywords: Risk, Uncertainty, Robustness, Ambiguity, Robust statistics, Prior selection.
    Date: 2023
  15. By: Reiss, Michael
    Abstract: The question of how a pure fiat currency is enforced and comes to have a non-zero value has been much debated (Selgin, 1994). What is less often addressed is, in the case where the enforcement is taken for granted and we ask what value (in terms of goods and services) the currency will end up taking. Establishing a decentralised mechanism for price formation has proven a challenge for economists: "Since no decentralized out-of-equilibrium adjustment mechanism has been discovered, we currently have no acceptable dynamical model of the Walrasian system." (Gintis, 2006) In his paper, Gintis put forward a model for price discovery based on the evolution of the model's agents, i.e. \poorly performing agents dying and being replaced by copies of the well performing agents." It seems improbable that this mechanism is the driving force behind price discovery in the real world. This paper proposes a more realistic mechanism and presents results from a corresponding agent based model.
    Keywords: Price discovery, Walrasian system, Agent based model
    JEL: E37 E47
    Date: 2023
  16. By: Armenak Antinyan (Cardiff Business School, Cardiff University, Cardiff, United Kingdom and Wenlan School of Business, Zhongnan University of Economics and Law, Wuhan, China); Luca Corazzini (Department of Economics and VERA, Ca’ Foscari University of Venice, Venezia, Italy and MUEEL, Masaryk University, Brno, Czech Republic); Miloš Fišar (Competence Center for Experimental Research, Vienna University of Economics and Business, Vienna, Austria, MUEEL, Masaryk University, Brno, Czech Republic, and Department of Economics, Ca’ Foscari, University of Venice, Venezia, Italy); Tommaso Reggiani (Cardiff Business School, Cardiff University, United Kingdom and MUEEL, Masaryk University, Brno, Czech Republic, and IZA)
    Abstract: There has been an increasing interest in altruistic behaviour in the domain of losses recently. Nevertheless, there is no consensus in whether the monetary losses make individuals more generous or more selfish. Although almost all relevant studies rely on a dictator game to study altruistic behaviour, the experimental designs of these studies differ in how the losses are framed, which may explain the diverging findings. Utilizing a dictator game, this paper studies the impact of loss framing on altruism. The main methodological result is that the dictators’ prosocial behaviour is sensitive to the loss frame they are embedded in. More specifically, in a dictator game in which the dictators have to share a loss between themselves and a recipient, the monetary allocations of the dictators are more benevolent than in a standard setting without a loss and in a dictator game in which the dictators have to share what remains of their endowments after a loss. These differences are explained by the different social norms that the respective loss frames invoke.
    Keywords: loss, framing, altruism, dictator game, experiment, social norms
    JEL: C91 D02 D64
    Date: 2022–10
  17. By: Nurul Labanihuda Abdull Rahman (Universiti Teknologi MARA, Malaysia Author-2-Name: Farah Lina Azizan Author-2-Workplace-Name: Universiti Teknologi MARA, Malaysia Author-3-Name: Shahizan Hassan Author-3-Workplace-Name: School of Business Management, Universiti Utara, Malaysia 06010 Sintok, Kedah, Malaysia Author-4-Name: Dahlia Ibrahim Author-4-Workplace-Name: Faculty of Business and Management, Universiti Teknologi MARA, Cawangan Kedah, Kampus Merbok, 08400 Merbok, Kedah, Malaysia Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: "Objective - The purpose of this study is to present a conceptual framework for implementing mobile commerce utilising the TAM model and the application of Individual-Collectivism at the Individual Level (ICAIL) as a moderating variable in the context of mobile commerce in Malaysia. Methodology - The data for this study were collected from 550 randomly selected students from four Malaysian institutions using a self-administered questionnaire. Findings - The study found that images significantly correlate with the perceived usefulness variable. In contrast, the relationships between subjective norm, output quality, and outcome demonstrability are not significant, and anxiety has a weak relationship with perceived ease of use, playfulness, perception of external control, and self-efficacy indicates significant relationships. Novelty - Subjective norm is related to the image in a substantial way, whereas perceived utility does not affect behaviour. Furthermore, no significant link was found between the moderating variable, ICAIL, and perceived utility, perceived ease of use, subjective norm, or behavioural intention. This study investigated mobile commerce and the use of the ICAIL, which provides information progress for mobile commerce enterprises, service providers, financial institutions, and governments. Type of Paper - Empirical"
    Keywords: M-commerce; Technology Acceptance Model; Individual-Collectivism at Individual level; Perceived Ease of Use; Perceived Usefulness
    JEL: F1 F10 F19
    Date: 2022–12–31
  18. By: Anna Bogomolnaia; Herve Moulin
    Abstract: We propose a fair and efficient solution for assigning agents to m posts subject to congestion, when agents care about both their post and its congestion. Examples include assigning jobs to busy servers, students to crowded schools or crowded classes, commuters to congested routes, workers to crowded office spaces or to team projects etc... Congestion is anonymous (it only depends on the number n of agents in a given post). A canonical interpretation of ex ante fairness allows each agent to choose m post-specific caps on the congestion they tolerate: these requests are mutually feasible if and only if the sum of the caps is n. For ex post fairness we impose a competitive requirement close to envy freeness: taking the congestion profile as given each agent is assigned to one of her best posts. If a competitive assignment exists, it delivers unique congestion and welfare profiles and is also efficient and ex ante fair. In a fractional (randomised or time sharing) version of our model, a unique competitive congestion profile always exists. It is approximately implemented by a mixture of ex post deterministic assignments: with an approxination factor equal to the largest utility loss from one more unit of congestion, the latter deliver identical welfare profiles and are weakly efficient. Our approach to ex ante fairness generalises to the model where each agent's congestion is weighted. Now the caps on posts depend only upon own weight and total congestion, not on the number of other agents contributing to it. Remarkably in both models these caps are feasible if and only if they give to each agent the right to veto all but (1/m) of their feasible allocations.
    Date: 2023–01
  19. By: Severin Rapp (Vienna University of Economics and Business, Department of Economics)
    Abstract: Wealth inequality assumes a central role in the debate on economic inequality. Yet, in contrast to the literature on income distribution, the role of the household in moderating inequality remains poorly understood. This paper argues that economies of scale to household wealth matter crucially, offering both a methodology and empirical results to account for household scale effects. As wealth enters individual utility directly (not at least due to bequest motives), it is possible to test for economies of scale in components of household wealth held for such non-consumption purposes, which may differ from traditional consumption scale effects. Using the model of a capitalist-spirit bequest motive to formalise the decision of allocating wealth between consumption and non-consumption purposes, this paper is the first to offer a concept of economies of scale for wealth rather than an ad-hoc approach. Adapting the model to accommodate household size effects, the second contribution of this paper is to estimate wealth economies of scale using satisfaction data from the German Socio-Economic Panel (SOEP), drawing on a non-linear estimator to recover structural model parameters. Next, the article appraises the implications of scale effects adjustments for the distribution of household wealth in Germany. Overall, the findings suggest that non-consumption economies of scale are almost perfect. Since non-consumption wealth matters primarily among the affluent households, adjusting household wealth for size does not affect them strongly, feeding into higher estimates of inequality. For example, the Palma ratio for Germany in 2012 increases by 17.1% once scale effects are taken into account, and the Gini index by 3%. The results do not only inform the academic literature on scale effects, and thus the measurement of inequality and living conditions, but also provides a new perspective on the influence of bequest (motives) on wealth inequality.
    Keywords: inequality, wealth, economies of scale, measurement, capitalist spirit
    JEL: C83 D14 D31 D63 G51
    Date: 2023–02
  20. By: Hoda Heidari; Solon Barocas; Jon Kleinberg; Karen Levy
    Abstract: Prior work has provided strong evidence that, within organizational settings, teams that bring a diversity of information and perspectives to a task are more effective than teams that do not. If this form of informational diversity confers performance advantages, why do we often see largely homogeneous teams in practice? One canonical argument is that the benefits of informational diversity are in tension with affinity bias. To better understand the impact of this tension on the makeup of teams, we analyze a sequential model of team formation in which individuals care about their team's performance (captured in terms of accurately predicting some future outcome based on a set of features) but experience a cost as a result of interacting with teammates who use different approaches to the prediction task. Our analysis of this simple model reveals a set of subtle behaviors that team-growth dynamics can exhibit: (i) from certain initial team compositions, they can make progress toward better performance but then get stuck partway to optimally diverse teams; while (ii) from other initial compositions, they can also move away from this optimal balance as the majority group tries to crowd out the opinions of the minority. The initial composition of the team can determine whether the dynamics will move toward or away from performance optimality, painting a path-dependent picture of inefficiencies in team compositions. Our results formalize a fundamental limitation of utility-based motivations to drive informational diversity in organizations and hint at interventions that may improve informational diversity and performance simultaneously.
    Date: 2023–01

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