Risk Preferences and Misconduct: Evidence from Politicians

Abstract

When seeking new leaders, business and government organizations alike often need individuals that are less risk averse, or even risk-seeking, in order to improve performance. However, individuals amenable to increased risktaking may be more likely to engage in misconduct. To study this issue, we explore US political scandals and the implicated politicians'portfolio choices.We …nd that a politician allocating all of her portfolio to risky investments has double the odds of being involved in a political sandal compared to a politician allocating all of her portfolio to safe investments. This suggests that those who are more willing to take risks in their personal …nances are also more likely to engage in misconduct. We validate portfolio choice as a measure of risk preferences by correlating actual high-stakes investment choices (average $700,000 US) to conventional laboratory lottery choices (average $51 US) of wealthy investors.

Whistleblower protection: Theory and experimental evidence

“… A (unreported) regression akin to the one of Table4reveals that the propensity to misbehave is negatively related to employers' risk aversion (which is line with a similar finding byMinor, 2015) and to the intensity of social preferences (again proxied by the amount offered in the dictator game), where p = 0.013 and p = 0.067, respectively.…”