Experimental methods: Pay one or pay all

Charness, Gary; Gneezy, Uri; Halladay, Brianna

doi:10.1016/j.jebo.2016.08.010

Cited by 274 publications

(115 citation statements)

References 43 publications

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“…()). Recently, Charness, Gneezy, and Halladay () pointed out that the pay‐one (or pay‐a‐subset) method is equal or even superior to the pay‐all method in the majority of cases.…”

Section: Investment Experiments With Professionals (Prof)mentioning

confidence: 99%

Rankings and Risk‐Taking in the Finance Industry

Kirchler¹,

Lindner²,

Weitzel

2018

The Journal of Finance

139

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Rankings are omnipresent in the finance industry, yet the literature is silent on how they impact financial professionals' behavior. Using lab-in-the-field experiments with 657 professionals and lab experiments with 432 students, we investigate how rank incentives affect investment decisions. We find that both rank and tournament incentives increase risk-taking among underperforming professionals, while only tournament incentives affect students. This rank effect is robust to the experimental frame (investment frame vs. abstract frame), to payoff consequences (own return vs. family return), to social identity priming (private identity vs. professional identity), and to professionals' gender (no gender differences among professionals).IN RECENT YEARS, EXCESSIVE RISK-TAKING in the finance industry has been depicted as one of the main factors contributing to the global financial crisis * All authors contributed equally. Michael Kirchler is in the (Financial Crisis Inquiry Commission (2011), Dewatripont and Freixas (2012)). In particular, bonus schemes and tournament incentives have been identified as among the main drivers of excessive risk-taking in developed financial markets (Rajan (2006), Diamond and Rajan (2009), Bebchuk and Spamann (2010)). Tournament incentives are characterized by two major components. The first and more obvious component comprises salary and other material rewards that depend on performance, which create rank-dependent "monetary incentives" to outperform others. The second and less obvious component comprises "nonmonetary incentives" to outperform peers. This second component-called "rank incentives"-provides utility to those at the top of the ranking and disutility to those at the bottom (Barankay (2015)) and thus captures relative performance preferences. 1 These nonmonetary, relative performance preferences can be driven by the desire for a positive self-image (Bénabou and Tirole (2006), Köszegi (2006)), or by concerns about public status (Frank (1985), Moldovanu, Sela, and Shi (2007)). Hence, rank incentives play a prominent, explicit role in tournaments. In the finance industry, rankings, ratings, and awards are the visible hallmarks of a strong culture of relative performance measurement and social competition. Funds are ranked or rated annually as are their managers. 2 Awards to the "Fund Manager of the Year," "Banker of the Year," or "Analyst of the Year" are sought-after distinctions in many areas of finance. 3 More informally, financial professionals (henceforth, professionals) often compare themselves with others in discussions about their investments and successes ("cheap talk"; see Crawford (1998)), effectively ranking each other on an ongoing basis. Recent evidence from laboratory and field experiments shows that, on average, rank incentives increase individuals' effort and performance (Azmat and Iriberri (2010), Blanes-i-Vidal and Nossol (2011), Tran and Zeckhauser (2012), Bandiera, Barankay, and Rasul (2013), Delfgaauw et al. (2013)), but they also promote unethical behavior...

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“…()). Recently, Charness, Gneezy, and Halladay () pointed out that the pay‐one (or pay‐a‐subset) method is equal or even superior to the pay‐all method in the majority of cases.…”

Section: Investment Experiments With Professionals (Prof)mentioning

confidence: 99%

Rankings and Risk‐Taking in the Finance Industry

Kirchler¹,

Lindner²,

Weitzel

2018

The Journal of Finance

139

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“…A growing number of studies indicate that these commonly used payment schemes with random components do not bias risk-taking behavior in experiments (Starmer and Sugden, 1991;Cubitt et al, 1998;Hey and Lee, 2005;March et al, 2015). Recently, Charness et al (2016) indicated that the pay-one (or pay-a-subset) method is either equal or even superior to the pay-all method in the majority of cases. These payment schemes with random components are also frequently used in studies with financial professionals to facilitate high stakes (Cohn et al, 2014(Cohn et al, , 2017Kirchler et al, 2018).…”

Section: Setup Of Experiments Opmlabmentioning

confidence: 99%

Delegated Decision Making and Social Competition in the Finance Industry

2018

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“…The task-related incentives were implemented according to the random lottery incentive system, a technique that avoids problems that are associated with other incentive payment schemes [36] and that has been shown to elicit true preferences [37,38]. When collecting data from experimental subjects on multiple rounds it is effective to pay a subset of subjects, a subset of rounds, or both, to incentivize the subjects [39]. Accordingly, after one game was randomly selected at the end of an experimental session, each player was randomly matched with one of the players in the other role for the purpose of calculating their payoff in that game.…”

Section: Subjectsmentioning

confidence: 99%

Incentive Magnitude Effects in Experimental Games: Bigger is not Necessarily Better

Pulford

Colman

Loomes

2018

Games

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In experimental games, task-related incentives are payments to experimental subjects that vary according to their strategy choices and the consequent outcomes of the games. Limited evidence exists regarding incentive magnitude effects in experimental games. We examined one-off strategy choices and self-reported reasons for choices in eight 3 × 3 and four 4 × 4 normal-form games under task-related incentives of conventional magnitude and compared them with choices and reasons in the same games under incentives five times as large. Both strategy choices and self-reported reasons for choices were almost indistinguishable between the two conditions. These results are in line with earlier findings on individual decision making and with a parametric model, in which the incentive elasticity of effort is very small when compared with other factors, such as the complexity of the decision problem.

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Experimental methods: Pay one or pay all

Cited by 274 publications

References 43 publications

Rankings and Risk‐Taking in the Finance Industry

Rankings and Risk‐Taking in the Finance Industry

Delegated Decision Making and Social Competition in the Finance Industry

Incentive Magnitude Effects in Experimental Games: Bigger is not Necessarily Better

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