Risking Other People's Money: Experimental Evidence on the Role of Incentives and Personality Traits

Abstract

Decision‐makers often face incentives to increase risk‐taking on behalf of others (e.g., they are offered bonus contracts and contracts based on relative performance). We conduct an experimental study of risk‐taking on behalf of others using a large heterogeneous sample, and we find that people respond to such incentives without much apparent concern for stakeholders. Responses are heterogeneous and mitigated by personality traits. The findings suggest that a lack of concern for others’ risk exposure hardly requires “financial psychopaths” in order to flourish, but it is diminished by social concerns.

Fostering the Best Execution Regime: An Experiment About Pecuniary Sanctions and Accountability in Fiduciary Money Management

“…In this setting, both Brennan et al (2008) and Chakravarty et al (2011) find that more risk is taken when investment decisions involve others money than when they involve own money. These findings are confirmed by the results of Andersson et al (2014) for risky decisions in the loss domain: the authors find a reduction in loss aversion when risky choices are taken on behalf of others, but when losses were excluded by design, the authors find no differences between individual and delegated choices. In contrast, Eriksen and Kvaløy (2010) find that people take less risk when they are responsible for the earnings of others.…”

“…The authors label this tendency “ other people's money effect .” In a similar setting, in both studies the authors introduce competition among fund managers. Andersson et al () find consistency of Agranov, Bisin, and Schotter's () results with a large, heterogeneous subject pool: managers take higher risk when managing money on behalf of others; this tendency is mitigated by the degree of subjects' pro‐sociality. Similar to these works, but without competition among managers, we implement a laboratory experiment with an explicit conflict of interests between the principal and the agent.…”

High‐powered Contracts, Self‐selection and Welfare in Settings with Externalities

“…The second strand of related experimental literature focuses on risky decision-making on behalf of others. In Lefebvre and Vieider (2014) and Andersson et al (2019), excessive risk-taking imposes externalities on other participants. In these experiments, however, subjects choose between different lotteries being randomly assigned to treatments; that is, there are no real effort tasks, and self-selection is not an issue.…”

Delegated Decision-Making in Finance

“…Several studies report a "risky shift" in risk-taking, indicating that decision-makers take more risks or show less loss-averse behavior for others than for themselves (e.g., Sutter, 2009;Chakravarty et al, 2011;Andersson et al, 2016;Vieider et al, 2016). However, a substantial number of studies also nd a "cautious shift" when the money of third parties is invested (Bolton and Ockenfels, 2010;Eriksen and Kvaløy, 2010)-see Füllbrunn and Luhan (2015) and Eriksen et al (2017) for overviews . Andersson et al (2019) run a large-scale study with a random population sample from Denmark.…”