Investors and fund managers may take greater risks if they are outperformed by their peers
Most of us like to perform at least as well as our peers but when that isn’t the case it can lead to riskier behaviour.
A new study reveals that taking greater risks could be seen in, for example, fund managers, investors and other decision makers, if they see lower returns than those they compare themselves to.
Economists at the University of Göttingen found that the change in risk strategy happens as soon as the lower returns occur. The opposite effect is also shown with those seeing greater returns lowering their level of risk.
"If, for example, a fund manager generates higher profits than his colleague, this can lead to a significant increase in his colleague's willingness to take risks in order to close the existing gap," explained Professor Holger Rau from the university’s Faculty of Business and Economics.
Holger Rau. Credit: Gesche Quent/University of Göttingen
But there is a caveat, as the results of this change in risk-taking behaviour depend on how strong the test subjects’ aversion to inequality is.
As well as implications for investors and financial services professionals, the study’s findings could shape the design of employment contracts in order to control the risk-taking behaviour of employees through organisational structures and information policies.
The authors - Rau and colleague Dr Stephan Müller - also say that the study provides insights into insurance strategies for social projects in order to minimise the existing financial risk for sponsors.
