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Conspicuous Conservatism In Risk Choice

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  • Boaz Moselle

    (The Brattle Group)

  • François Degeorge

    (University of Lugano and Swiss Finance Institute)

  • Richard Zeckhauser

    (Harvard University, Kennedy School of Government)

Abstract

We analyze the risk levels chosen by agents who have private information regarding their quality, and whose performance will be judged and rewarded by outsiders. Assume that risk choice is observable. Even risk-neutral agents will choose risk strategically to enhance their expected reputation. We show that conspicuous conservatism is to be expected: agents of different qualities choose levels below those that would be chosen if quality were observable. This happens because bad agents must cloak their identity by choosing the same risk level as good agents, and good agents are more likely to distinguish themselves if they reduce the risk level. Our results contrast starkly with those for the case when risk choice cannot be observed.

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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-15.

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Length: 28 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:chf:rpseri:rp0715

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Web page: http://www.SwissFinanceInstitute.ch
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Keywords: risk choice; signaling; conservatism;

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  1. Ilia Tsetlin & Anil Gaba & Robert L. Winkler, 2004. "Strategic Choice of Variability in Multiround Contests and Contests with Handicaps," Journal of Risk and Uncertainty, Springer, vol. 29(2), pages 143-158, 09.
  2. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, vol. 55(3), pages 647-61, May.
  3. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
  4. FranÁois Degeorge & Boaz Moselle & Richard Zeckhauser, 2004. "The Ecology of Risk Taking," Journal of Risk and Uncertainty, Springer, vol. 28(3), pages 195-215, 05.
  5. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November.
  6. Christian Gollier, 2004. "Misery Loves Company: Equilibrium Portfolios With Heterogeneous Consumption Externalities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1169-1192, November.
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