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Effects of bonuses on diversification in delegated stock portfolio management

Author

Listed:
  • Hedesström, Martin
  • Gärling, Tommy
  • Andersson, Maria
  • Biel, Anders

Abstract

Our aim is to investigate whether bonuses make stock portfolio managers take higher risks by diversifying less. In two experiments with undergraduates role-playing being professional investors, we test a model implying that they initially anchor on 100% allocation to one of two options delivering the largest bonus payout, then adjust towards allocating equally much to each option (maximal diversification) depending on the degree of perceived uncertainty of the bonus outcome. In Experiment 1 we find as expected that when the bonus is reduced, investment in the preferred option decreases such that diversification increases. Diversification is larger when uncertainty of the bonus outcome is made salient. In Experiment 2 we show that a majority herd strengthens the effect of a bonus for investing in a preferred option despite salient uncertainty of the bonus outcome. In actual stock markets such herding effects would result from investors being similarly rewarded by bonuses.

Suggested Citation

  • Hedesström, Martin & Gärling, Tommy & Andersson, Maria & Biel, Anders, 2015. "Effects of bonuses on diversification in delegated stock portfolio management," Journal of Behavioral and Experimental Finance, Elsevier, vol. 7(C), pages 60-70.
    • Handle: RePEc:eee:beexfi:v:7:y:2015:i:c:p:60-70
    DOI: 10.1016/j.jbef.2015.07.001
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    Cited by:

    1. Gimeno, Ruth & Andreu, Laura & Sarto, José Luis, 2022. "Fund trading divergence and performance contribution," International Review of Financial Analysis, Elsevier, vol. 83(C).
    2. Indārs, Edgars Rihards & Savin, Aliaksei & Lublóy, Ágnes, 2019. "Herding behaviour in an emerging market: Evidence from the Moscow Exchange," Emerging Markets Review, Elsevier, vol. 38(C), pages 468-487.
    3. R. Eki Rahman & Ermawati, 2020. "An Analysis Of Herding Behavior In The Stock Market: A Case Study Of The Asean-5 And The United States," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 23(3), pages 297-318, October.

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