Abstract
A pervasive feature in the finance industry is relative performance, which can include extrinsic (money), intrinsic (self-image), and reputational (status) motives. In this paper, we model a portfolio decision with two assets and investigate how reputational motives (i.e., the public announcement of the winners or losers) influence risk-taking in investment decisions vis-a-vis intrinsic motives. We test our hypotheses experimentally with 864 students and 330 financial professionals. We find that reputational motives play a minor role among financial professionals, as the risk-taking of underperformers is already increased due to intrinsic motives. Student behavior, however, is mainly driven by reputational motives with risk-taking levels that come close to those of professionals when winners or losers are announced publicly. This indicates that professionals show higher levels of intrinsic (self-image) incentives to outperform others compared to non-professionals (students), but a similar behavior can be sparked among the latter by adding reputational incentives.
Highlights
Recent research identified tournament incentives as an important driver for excessive risktaking in finance (Rajan, 2006; Diamond and Rajan, 2009; Bebchuk and Spamann, 2010)
We show that the public announcement of the winner or loser increases average risk-taking among students compared to a treatment with anonymous rank information (Treatment RANKING)
We presented theoretical mechanisms and experimental evidence regarding how rank incentives impact risk-taking in investment decisions among 864 non-professionals and 330 financial professionals from investment-related areas, such as fund management, trading, private banking, and asset management
Summary
Recent research identified tournament incentives as an important driver for excessive risktaking in finance (Rajan, 2006; Diamond and Rajan, 2009; Bebchuk and Spamann, 2010). The first and most obvious component is the extrinsic incentive of money, which often depends on relative performance. Rank incentives reflect an evolutionary established pattern to do better than peers and promise a non-monetary utility to those at the top and a disutility to those at the bottom (Barankay, 2015). Recent experimental evidence shows that rank incentives can increase individuals’ effort and performance (Azmat and Iriberri, 2010; Blanes-i-Vidal and Nossol, 2011; Tran and Zeckhauser, 2012; Bandiera et al, 2013; Delfgaauw et al, 2013; Charness et al, 2014; Barankay, 2015). In asset market experiments with students, Schoenberg and Haruvy (2012) display either the portfolio value of the best or the worst performer to all traders and report effects on market prices and individual satisfaction levels
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