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Optimal risk taking in an uneven tournament game with risk averse players

  • Kräkel, Matthias

We analyze the optimal choice of risk in a two-stage tournament game between two players that have different concave utility functions. At the first stage, both players simultaneously choose risk. At the second stage, both observe overall risk and simultaneously decide on effort or investment. The results show that those two effects which mainly determine risk taking - an effort effect and a likelihood effect - are strictly interrelated. This finding sharply contrasts with existing results on risk taking in tournament games with symmetric equilibrium efforts where such linkage can never arise. Conditions are derived under which this linkage leads to a reversed likelihood effect so that the favorite (underdog) can increase his winning probability by increasing (decreasing) risk which is impossible in a completely symmetric setting.

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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 44 (2008)
Issue (Month): 11 (December)
Pages: 1219-1231

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Handle: RePEc:eee:mateco:v:44:y:2008:i:11:p:1219-1231
Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

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