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Do markets encourage risk-seeking behaviour?

Author

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  • Mengel, F.

    (Microeconomics & Public Economics)

  • Peeters, R.J.A.P.

    (Microeconomics & Public Economics)

Abstract

Excessive risk taking in markets can have devastating consequences as recent financial crises have high-lighted. In this paper we ask whether markets as an institution encourage such excessive risk taking. To establish causality, we isolate the effects of market interaction in a laboratory experiment keeping other possibly confounding factors constant. We find that the opposite is true. Markets decrease participants' willingness to take risks. This finding can be explained by social comparison utility in the presence of negatively correlated risks and we provide evidence for such a mechanism.

Suggested Citation

  • Mengel, F. & Peeters, R.J.A.P., 2015. "Do markets encourage risk-seeking behaviour?," Research Memorandum 042, Maastricht University, Graduate School of Business and Economics (GSBE).
  • Handle: RePEc:unm:umagsb:2015042
    DOI: 10.26481/umagsb.2015042
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    File URL: https://cris.maastrichtuniversity.nl/ws/files/1191902/guid-c678758f-a356-4d00-99b5-613ed72ffb77-ASSET1.0.pdf
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    Cited by:

    1. Paul Gortner & Joël van der Weele, "undated". "Peer Effects and Risk Sharing in Experimental Asset Markets," Tinbergen Institute Discussion Papers 19-027/I, Tinbergen Institute.

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