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Taking Over Control:An Experimental Analysis of Delegation Avoidance in Risky Choices

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  • Matteo Ploner

    ()

  • Viola Saredi

Abstract

We experimentally investigate delegation in risky choices, in a principal-agent framework. Agents are asked to build a portfolio for their principals by selecting among prospects that are presented either in a conventional descriptive way or are experienced via exploration (i.e., clicking paradigm). Principals are given the opportunity to take over control and build their own portfolio by paying a fee. We find that portfolios built by principals are more efficient in terms of mean-variance ratio and more ambitious in terms of expected returns than those built by the delegated agents. The higher quality of principal�s portfolios is associated to higher effort exerted in the experience framework by principals than by agents. Principals anticipate differences in portfolio�s performance, but pay a control fee that is generally excessive and negatively impacts on final earnings.

Suggested Citation

  • Matteo Ploner & Viola Saredi, 2016. "Taking Over Control:An Experimental Analysis of Delegation Avoidance in Risky Choices," CEEL Working Papers 1606, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
  • Handle: RePEc:trn:utwpce:1606
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    File URL: http://www-ceel.economia.unitn.it/papers/papero16_06.pdf
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    References listed on IDEAS

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    1. Ola Andersson & Håkan J. Holm & Jean-Robert Tyran & Erik Wengström, 2016. "Deciding for Others Reduces Loss Aversion," Management Science, INFORMS, vol. 62(1), pages 29-36, January.
    2. Pollmann, Monique M.H. & Potters, Jan & Trautmann, Stefan T., 2014. "Risk taking by agents: The role of ex-ante and ex-post accountability," Economics Letters, Elsevier, vol. 123(3), pages 387-390.
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    4. Sujoy Chakravarty & Glenn W. Harrison & Ernan E. Haruvy & E. Elisabet Rutström, 2011. "Are You Risk Averse over Other People's Money?," Southern Economic Journal, Southern Economic Association, vol. 77(4), pages 901-913, April.
    5. Elke U. Weber & Richard A. Milliman, 1997. "Perceived Risk Attitudes: Relating Risk Perception to Risky Choice," Management Science, INFORMS, vol. 43(2), pages 123-144, February.
    6. Kvaløy, Ola & Eriksen, Kristoffer & Luzuriaga , Miguel, 2014. "Risk-taking with Other People’s Money," UiS Working Papers in Economics and Finance 2014/21, University of Stavanger.
    7. Elke U. Weber & Christopher Hsee, 1998. "Cross-Cultural Differences in Risk Perception, but Cross-Cultural Similarities in Attitudes Towards Perceived Risk," Management Science, INFORMS, vol. 44(9), pages 1205-1217, September.
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    More about this item

    Keywords

    Description-Experience Gap; delegated decision-making; control premium; risk taking; experiment;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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