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Financial risk-taking related to individual risk preference, social comparison and competition

Financial risk-taking related to individual risk preference, social comparison and competition The purpose of this paper is to investigate how social comparison and motivation to compete account for elevated risk-taking in fund management corroborated by asset market experiments when performance depends on rank-based incentives.Design/methodology/approachIn two laboratory experiments, university students (n1 = 240/n2 = 120) make choices between risky and certain outcomes of hypothetical sums of money. Both experiments investigate in which direction risky choices in an individual condition (individual risk preference) are shifted when participants compare their performance to another participant's performance (social comparison), being instructed or not to outperform the other (incentive to compete).FindingsIn the absence of incentives to compete, participants tend to minimize the differences between expected outcomes to themselves and to the other, but when provided with incentives to compete, they tend to maximize these differences. An independent additional increase in risk-taking is observed when participants are provided with incentives to compete.Originality/valueOriginal findings include that social comparison does not evoke motivation to compete unless incentives are offered and that increases in risk-taking depend both on what the other chooses and the incentives. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Behavioral Finance Emerald Publishing

Financial risk-taking related to individual risk preference, social comparison and competition

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References (56)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1940-5979
DOI
10.1108/rbf-11-2019-0153
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to investigate how social comparison and motivation to compete account for elevated risk-taking in fund management corroborated by asset market experiments when performance depends on rank-based incentives.Design/methodology/approachIn two laboratory experiments, university students (n1 = 240/n2 = 120) make choices between risky and certain outcomes of hypothetical sums of money. Both experiments investigate in which direction risky choices in an individual condition (individual risk preference) are shifted when participants compare their performance to another participant's performance (social comparison), being instructed or not to outperform the other (incentive to compete).FindingsIn the absence of incentives to compete, participants tend to minimize the differences between expected outcomes to themselves and to the other, but when provided with incentives to compete, they tend to maximize these differences. An independent additional increase in risk-taking is observed when participants are provided with incentives to compete.Originality/valueOriginal findings include that social comparison does not evoke motivation to compete unless incentives are offered and that increases in risk-taking depend both on what the other chooses and the incentives.

Journal

Review of Behavioral FinanceEmerald Publishing

Published: Apr 27, 2021

Keywords: Mutual fund industry; Performance evaluation; Financial risk-taking; Social comparison; Competition

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