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A Study of How Pursuit of Wealth Rank Distorts Risk Preferences

Author

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  • Dimitry Rtischev

Abstract

We theoretically explore the risk-taking behavior of two unequally-endowed risk-neutral agents who are presented with opportunities to play lotteries. We find that if the agents consider rank in the wealth distribution more important than wealth itself, then their risk preferences are distorted in a way that lowers their expected income, raises inequality and increases wealth-rank mobility. In equilibrium, the rich agent avoids some positive expected return lotteries and both agents gamble on some negative expected return lotteries. We simulate and graph equilibrium strategies to visualize how trying to get richer differs from trying to be richer than someone else.

Suggested Citation

  • Dimitry Rtischev, 2019. "A Study of How Pursuit of Wealth Rank Distorts Risk Preferences," Gakushuin Economic Papers, Gakushuin University, Faculty of Economics, vol. 55(4), pages 155-172.
    • Handle: RePEc:abc:gakuep:55-4-3
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    File URL: http://www.gakushuin.ac.jp/univ/eco/gakkai/pdf_files/keizai_ronsyuu/contents/contents2018/5504/5504rtischev/5504rtischev.pdf
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    More about this item

    Keywords

    wealth rank; risk-taking; gambling; positional competition; relative income;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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