Git repo in shared folder or multiple cloned repos in each researcher individual folder for collaborative data analysis?
I pretty much agree that you've got two options:
Work as is, all in the same directory on the same system.
There are a lot of problems with this approach.

If multiple people are working at the same time modifying source files you'll step on each other's feet a lot. Two people can't edit the same file at the same time. You'll deal with annoying &quot;that file is in use by another process&quot; messages all the time.
Someone might make a change that affects the behavior of a function and it'll come as a surprise to someone else.

On the other hand, the issues you'll run into are fairly easy to recognize and plan around. If you all aren't familiar with Git, and expect to be making actual code changes fairly infrequently, the cons aren't too big of an issue.
I would avoid this at all costs. I've worked on projects before where multiple people were working on the same files in the same directory on a remote server and it's awful. Words almost cannot describe the frustration that it leads to.
Multiple versions of the repository
Set up the filesystem to look like:
user1/
--root/
----/functions
----/data
----/documentation
----/output
user2/
--root/
----/functions
----/data
----/documentation
----/output
user3/
--root/
----/functions
----/data
----/documentation
----/output
user4/
--root/
----/functions
----/data
----/documentation
----/output

Each user should have a directory that contains it's own clone of the repository. This lets you avoid stepping on each other's toes when working at the same time, and lets you emulate a &quot;normal&quot; git environment.
From there it's just business as normal, and as long as y'all can overcome the initial learning curve it'll work out much better than if you're all working in the same space.