Rankings and Risk-Taking in the Finance Industry

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Rankings are a pervasive feature of the finance industry. Although they have no direct monetary consequences, rankings provide utility for intrinsic (positive self-image) and extrinsic (status) reasons. We recruit a unique subject pool of 204 financial professionals and investigate how anonymous rankings influence risk-taking in investment decisions. We find that rankings increase risk-taking because of financial professionals' desire for positive self-image. This particularly applies to underperformers, who take the highest risks. Incentivizing rankings monetarily does not further increase risk-taking. In a comparative study with 432 students we find that student behavior is not driven by rankings. Terms of use: Documents inJEL: G02, G11, D03, C93

Delegated Decision Making and Social Competition in the Finance Industry

“…Kirchler et al (2018) show that professionals' preference for high rankings in investment decisions on their own behalf differs from student subjects'. The authors report that the rank effect is robust to the experimental frame (investment frame versus abstract frame), to the underlying incentives (non-incentivized ranking versus tournament incentives), to social identity priming (private identity versus professional identity), and to professionals' gender (no gender differences among professionals).…”

“…Our baseline treatment OWN was identical to Treatment TRANK FIN of the online experiment in Kirchler et al (2018). 6 Below, we outline details on Treatment OWN first and add differences in the three treatments, in which professionals invest real third parties' money.…”

“…In this paper, we attempt to close this gap by investigating the impact of rank incentives and monetary (tournament) incentives on professionals' risk-taking behavior when they are investing for third parties. Despite the emerging literature on rank/tournament incentives (e.g., Dijk et al, 2014;Kirchler et al, 2018) and on delegated decision making in finance (e.g., Agranov et al, 2013;Andersson et al, 2013Andersson et al, , 2016, our approach is innovative because of the following: (i) we study financial professionals as fiduciary investment managers who (ii) invest real money from third parties, when (iii) rank incentives and monetary incentives are present.…”

“…Subsequently, professionals had to choose between a risk-free alternative and a risky asset for themselves. The investment task was a modified version of Kuziemko et al (2014) and identical to the online experiment in Kirchler et al (2018). The ranking itself was not relevant for the monetary payout.…”

“…Across studies, one major result is that professionals' behavior can substantially differ from standard (student) subjects' and representative general population samples'. For instance, professionals exhibit a higher degree of myopic loss aversion (Haigh and List, 2005), are less prone to anchoring than students (Kaustia et al, 2008), can better discern the quality of public signals in information cascades (Alevy et al, 2007), and react more strongly to rank incentives (Kirchler et al, 2018).…”