The influence of investment experience on market prices: laboratory evidence

Huber, Jürgen; Kirchler, Michael; Stöckl, Thomas

doi:10.1007/s10683-015-9445-0

Cited by 13 publications

(4 citation statements)

References 43 publications

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“…The investment game was inspired by, and resembles games of, Lohrenz et al. (), Ehm, Kaufmann, and Weber (), Bradbury, Hens, and Zeisberger (), and Huber, Kirchler, and Stöckl (). In each period, the risk‐free asset yielded a return of

R F = 0.015

(1.5%) and the risky asset paid an expected return of

R E T_A S S E T = 0.036

(3.6%) with a standard deviation of 15.9%.…”

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

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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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R F = 0.015

(1.5%) and the risky asset paid an expected return of

R E T_A S S E T = 0.036

(3.6%) with a standard deviation of 15.9%.…”

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

Self Cite

139

View full text Add to dashboard Cite

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“…The investment game was inspired by, and resembles games of, Lohrenz et al (2007), Bradbury et al (2015), Ehm et al (2014), andHuber et al (2015). 3 In each period, the risk-free asset yielded a return of R f = 0.015 (1.5 percent) and the risky asset paid an expected return of R m = 0.036 (3.6 percent) with a standard deviation of 15.9 percent.…”

Section: The Investment Gamementioning

confidence: 99%

Rankings and Risk-Taking in the Finance Industry

Lindner²,

2016

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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

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“…In contrast, if a person is familiar with such a domain-specific language, buzz words may make the decision problem less complex for this other person. Also, graphical representation of the same information can impact choice complexity and, consequently, people's preferences (Huber et al, 2016).…”

Section: Facet 3 -Choice Informationmentioning

confidence: 99%

Title replaced for the review

Andraszewicz¹

2023

Preprint

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We are taking numerous decisions every day. Most of these decisions are complex. However, the scientific literature in psychology, judgment and decision making, management and complexity science devoted to decision making, uses the terms “complexity” and “complex decision making” quite loosely. This paper aims to systematize the meaning of “complexity of decision making”. It identify five facets of complexity in decision making: 1) choice structure – referring to the relevant number and content of choice options, 2) choice environment – referring to the context and physical environment of a decision problem, 3) choice information – referring to the presentation, correctness and completeness of information about the choice options, 4) dynamic change – referring to the decision’s situatedness in dynamically changing environments, and 5) interconnectedness of elements of a decision problem – referring to the complexity of social and economic networks, in which decisions are taken. It proposes a new definition of complexity of decision making. It also highlights the need to investigate subjective complexity of a decision problem by using a combination of interdisciplinary methods.

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The influence of investment experience on market prices: laboratory evidence

Cited by 13 publications

References 43 publications

Rankings and Risk‐Taking in the Finance Industry

Rankings and Risk‐Taking in the Finance Industry

Rankings and Risk-Taking in the Finance Industry

Title replaced for the review

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