Does size matter in group decision making? Simulation experiments with LNG professionals bidding in auction markets

Abstract

Purpose: An important issue in decision-making processes is whether groups decide better than individuals. This paper compares the bidding behavior of groups of professionals while playing a business game that simulates, in a controlled environment, the sequential unit capacity auctions in the Spanish LNG market.Design/methodology/approach: First, we randomly grouped professionals in groups of different size—SOLOs, DUOs, and TRIOs—and played the game in-situ under both First and Second price unit capacity auctions, with SOLOs outperforming groups. Second, we ran non-parametric simulations mixing professionals in groups of different size, in which bids were coupled with those registered during the in-situ sessions. Third, we ran non-parametric simulations in which the players were either ‘rational machines’ that bid according to Nash equilibrium or groups of ‘professionals’ of different size.Findings: The size of the decision group does matter. After the in-situ and the bootstrapped simulated games, the main result is that size does matter, and groups are not necessarily superior to individuals bidding alone. SOLO players bid closer to MACHINEs and lower than DUOs or TRIOs, while obtaining about the same number of units and higher payoffs than groups. Additionally, the ‘degree of rationality’ of the participants does also matter.Research limitations/implications: Even after applying the hybrid simulation methodology to increase sample size and allow for additional experimental settings, some of the scenarios are fictitious. Modification of the business game to allow for an even more realistic game could be implemented.Practical implications: After the hybrid simulation approach, the main implication of the paper is that to increase efficiency in resource allocation professionals should bid individually while using the theoretical knowledge of rational machines.Originality/value: To our knowledge, this is the first time that this double-experiment simulation methodology is used to analyze bidding behavior in auctions.