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No Guts, No Glory: An Experiment on Excessive Risk-Taking

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  • Kristoffer W. Eriksen
  • Ola Kvaløy

Abstract

We study risk-taking behavior in tournaments where the optimal strategy is to take no risk. By keeping the optimal strategy constant, while varying the competitiveness in the tournaments, we are able to investigate the relationship between competitiveness and excessive risk-taking. In the most competitive tournament, less than 10% of the subjects played the optimal strategy in the first rounds. The majority playing dominated strategies increased their risk-taking during game of play. When we removed feedback about winner’s decisions each round, and when we reduced the number of contestants in the tournaments, subjects significantly reduced their risk-taking.

Suggested Citation

  • Kristoffer W. Eriksen & Ola Kvaløy, 2017. "No Guts, No Glory: An Experiment on Excessive Risk-Taking," Review of Finance, European Finance Association, vol. 21(3), pages 1327-1351.
    • Handle: RePEc:oup:revfin:v:21:y:2017:i:3:p:1327-1351.
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    File URL: http://hdl.handle.net/10.1093/rof/rfw016
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    References listed on IDEAS

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    1. Emmanuel Dechenaux & Dan Kovenock & Roman Sheremeta, 2015. "A survey of experimental research on contests, all-pay auctions and tournaments," Experimental Economics, Springer;Economic Science Association, vol. 18(4), pages 609-669, December.
    2. Baldwin,John R. & Gorecki,Paul, 1998. "The Dynamics of Industrial Competition," Cambridge Books, Cambridge University Press, number 9780521633574, January.
      • Baldwin,John R. & Gorecki,Paul With contributions by-Name:Caves,Richard E. With contributions by-Name:Dunne,Tim With contributions by-Name:Haltiwanger,John, 1995. "The Dynamics of Industrial Competition," Cambridge Books, Cambridge University Press, number 9780521465618, November.
    3. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-1326, December.
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    Cited by:

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    2. Embrey, Matthew & Seel, Christian & Philipp Reiss, J., 2024. "Gambling in risk-taking contests: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 221(C), pages 570-585.
    3. Zhao, Lu & Wang, Liang & Luo, Ronghua, 2024. "Mutual fund tournaments: State-dependent risk taking with transaction costs," Emerging Markets Review, Elsevier, vol. 59(C).
    4. Usvitskiy, Alexander, 2022. "Strategic risk-taking in dynamic contests," Journal of Economic Behavior & Organization, Elsevier, vol. 198(C), pages 511-534.
    5. Zhang, Kun & Yang, Xiaolan & Gao, Mei, 2023. "When to use tournament incentives? Evidence from an investment experiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).

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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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