Are You Risk Averse over Other People's Money?

Abstract

Decisions with uncertain outcomes are often made by one party in settings where another party bears the consequences. Whenever an individual is delegated to make decisions that affect others, such as in the typical corporate structure, does the individual make decisions that reflect the risk preferences of the party bearing the consequences? We examine this question in two simple settings, lottery choices and sealed-bid auctions, using controlled laboratory experiments. We find that when an individual makes a decision for an anonymous stranger, there is a tendency to exhibit less risk aversion. This reduction in risk aversion is relative to his or her own preferences, and it is also relative to his or her belief about the preferences of others. This result has significant implications for the design of contracts between principals and agents.

Which proportion of SR investments is enough? A survey-based approach

“…Following these studies we wish to explore whether differences in investment behavior and in investors' preferences as described above are driven by demographic factors such as gender, age, education and investment volume. Moreover, some researchers such as Eriksen and Kvaløy (2010), Chakravarty et al (2011), Andersson et al (2013) and Pollmann et al (2014) find that the risk-taking behavior of individuals differs between investment decisions made with their own money and with other people's money. Thus, we are interested in whether the participants make their decisions only on behalf of themselves or also on behalf of others.…”

Am I My Peer's Keeper? Social Responsibility in Financial Decision Making

“…Finally, one might argue that fairness preferences play a role when payments for the money managers are xed or known beforehand in OTH as for example in Eriksen and Kvaløy (2010), Reynolds et al (2009) or Chakravarty et al (2011. A money manager receiving a small xed payo might make smaller investments for his clients if he perceives that high investments might create payo inequalities to his disadvantage.…”

“…money managers take a signicantly higher risk for others than for themselves. Chakravarty et al (2011) nd that subjects tend to be less risk averse when deciding for others, using a rst price sealed bid auction against computer bidders as well as a multiple price list. They conclude that decision makers display social preferences when deciding for others but also argue, though do not test, that decision making for others is not dierent from hypothetical risk taking.…”

Delegated Decision Making and Social Competition in the Finance Industry

“…"risky shift," 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). In contrast, a substantial number of studies find a "cautious shift" when the money of third parties is invested (Bolton and Ockenfels, 2010;Eriksen and Kvaloy, 2010).…”