Title：Winning ways: How rank-based incentives shape risk-taking decisions

Speaker：Dawei Fang, University of Gothenburg

Time：2025/01/09 13:30-15:00

Venue：432 Zengxianzi Science Building

Abstract

Risk-taking spurred by rank-based contest rewards can have enormous consequences, from developing breakthrough technologies in research competitions to hedge fund collapses engendered by risky bets aimed at raising league-table rankings. We develop a theoretical model of risk-taking that permits contestants to make arbitrary, mean-preserving changes in their random contest performance and use this framework to produce determinant predictions about the effect of contest structure on the statistical properties of contestant performance---including modality, tail behavior, dispersion, and skewness. In a laboratory experiment utilizing an interactive distribution builder to elicit subjects' risk-taking strategies, we confirm our main theoretical predictions. Increasing the real-gain inequality of contest rewards or contest size increases performance dispersion; convexifying the rank-reward relationship or adding contestants to a contest with a fixed number of identical winner rewards increases both the dispersion and skewness of performance.