Algorithmic advice as a credence good

Biermann, Jan ; Horton, John ; Walter, Johannes

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URN: urn:nbn:de:bsz:180-madoc-643098
Document Type: Working paper
Year of publication: 2022
The title of a journal, publication series: ZEW Discussion Papers
Volume: 22-071
Place of publication: Mannheim
Publication language: English
Institution: Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: C91 , D79 , D80 , M21 , O30,
Keywords (English): human-algorithm decision making , algorithmic advice , credence goods
Abstract: Actors in various settings have been increasingly relying on algorithmic tools to support their decision-making. Much of the public debate concerning algorithms — especially the associated regulation of new technologies — rests on the assumption that humans can assess the quality of algorithms. We test this assumption by conducting an online experiment with 1263 participants. Subjects perform an estimation task and are supported by algorithmic advice. Our first finding is that, in our setting, humans cannot verify the algorithm’s quality. We, therefore, argue that algorithms exhibit traits of a credence good – decision-makers cannot verify the quality of such goods, even after “consuming” them. Based on this finding, we test two interventions to improve the individual’s ability to make good decisions in algorithmically supported situations. In the first intervention, we explain the way the algorithm functions. We find that while explanation helps participants recognize bias in the algorithm, it remarkably decreases human decision-making performance. In the second treatment, we reveal the task’s correct answer after every round and find that this intervention improves human decision-making performance. Our findings have implications for policy initiatives and managerial practice.

Das Dokument wird vom Publikationsserver der Universitätsbibliothek Mannheim bereitgestellt.

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