Do as I Do: Paternalism and Preference Differences in Decision-Making for Others

We study whether money managers impose their risk preferences onto investments for clients paternalistically and whether they impose them more, the more their client’s risk preference differs from their own. We conduct an online experiment, where participants make an investment decision for themselves and on behalf of another participant (as money managers). When investing for another (the client), we use the strategy method to elicit decisions for every possible investment the other participant could have made for their own payoff, such that money managers have complete information of their client’s risk preference. With this, we systematically manipulate the difference in risk preference between the manager and client within subjects. Overall, we find that money managers do project their risk preferences onto clients’ investments due to paternalism. The manager’s risk preference significantly influenced their investment for others, despite knowing their client’s risk preference, and them having no stake in the decision. Investments were also significantly predicted by the client’s known risk preference, but this was a substantially worse predictor than the managers’ preference. We also find, as predicted, that managers do deviate further from their client’s risk preference, the more that preference differs from their own.