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Myopic risk-taking in tournaments

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  • Eriksen, Kristoffer W.
  • Kvaløy, Ola

Abstract

There is a common notion that incentive schemes in the financial industry trigger myopia and risk-taking. In some sense this contrasts with the concept of myopic loss aversion (MLA), which implies that myopia mitigates risk-taking. A number of experimental studies support the MLA-hypothesis by showing that people take less risk the more frequently their investments are evaluated. In this paper we show experimentally that if subjects are exposed to tournament incentives, the standard MLA effect disappears. Rather, there is a tendency towards more risk-taking the more frequently investments are evaluated.

Suggested Citation

  • Eriksen, Kristoffer W. & Kvaløy, Ola, 2014. "Myopic risk-taking in tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 37-46.
  • Handle: RePEc:eee:jeborg:v:97:y:2014:i:c:p:37-46
    DOI: 10.1016/j.jebo.2013.10.004
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    Cited by:

    1. Federico Fornasari & Matteo Ploner & Ivan Soraperra, 2015. "Investment in Risk Protection and Social Preferences: An Experimental Study," CEEL Working Papers 1503, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    2. Stracke, Rudi & Höchtl, Wolfgang & Kerschbamer, Rudolf & Sunde, Uwe, 2014. "Optimal prizes in dynamic elimination contests: Theory and experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 102(C), pages 43-58.
    3. Kräkel, Matthias & Nieken, Petra & Przemeck, Judith, 2014. "Risk taking and investing in electoral competition," European Journal of Political Economy, Elsevier, vol. 33(C), pages 98-120.
    4. Eriksen, Kristoffer W & Kvaløy, Ola, 2015. "2015/01 No guts, no glory: An experiment on excessive risk-taking by Kristoffer W. Eriksen and Ola Kvaløy," UiS Working Papers in Economics and Finance 2015/1, University of Stavanger.
    5. Fang, Dawei & Holmén, Martin & Kleinlercher, Daniel & Kirchler, Michael, 2017. "How tournament incentives affect asset markets: A comparison between winner-take-all tournaments and elimination contests," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 1-27.

    More about this item

    Keywords

    Risk-taking; Incentives; Tournaments; Myopic loss aversion;

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

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