Most people do not act solely in their own interests when distributing funds, but instead take into consideration both the positive and negative consequences for everyone involved. Numerous examples indicate, however, that many people find it hard to weigh up costs and benefits efficiently when the costs are spread over several individuals. In a publication which will appear shortly in the Review of Economic Studies, Michael Kosfeld, Chair of Organization and Management at Goethe University Frankfurt, together with Heiner Schumacher (University of Leuven), Iris Kesternich (University of Leuven) and Joachim Winter (LMU), presents the results of experimental trials in which two thirds of the test persons are insensitive to group size: From a certain number of people upwards, they no longer integrate into their decision-making process the size of the group of persons negatively affected, so that their actions as a whole are contradictory. They take the cost-benefit ratio into consideration when the costs are borne by only one person or just a few people, yet readily accept an exorbitant disparity between costs and benefits when a large group of people are affected and the costs per capita thus appear low.
The results suggest that people find it difficult to incorporate groups as an entirety into their decision. "It is hard to put oneself in the position of a group of people", explains Michael Kosfeld. "That's why we tend to adopt the position of a representative member of the group. The result can then be that we disregard the size of the affected group." Whether 10, 100 or 1000 people are then affected by a decision which only benefits a few ceases to play a role.
Depending on the scale, such behaviour can cause enormous social costs. Above all politicians, but also medical practitioners, for example, are regularly faced with decisions which lead to a positive outcome for just a few at the expense of large groups: Taxpayers, the population, insurance policy holders. If the cost-benefit ratio is not adequately considered in such decision-making situations, then there is the threat of major economic losses overall.
Ultimately, however, anyone can be taken in by this mistake: To do a good deed for an individual or a small group we are often extremely generous, for example when making a donation. Yet when it's a matter of the cost for a large community (current catchword: tax-saving schemes), we don't look at the overall costs but instead only at the minimal costs per citizen.
Schumacher, H., Kesternich, I., Kosfeld, M., Winter, J. (2016), "One, Two, Many – Insensitivity to Group Size in Games with Concentrated Benefits and Dispersed Costs", forthcoming in Review of Economic Studies.
Dr. Michael Kosfeld