An experimental study of the impact of competition for Other People's Money: the portfolio manager market

Marina Agranov, Alberto Bisin, Andrew Schotter

    Research output: Contribution to journalArticle

    Abstract

    In this paper we experimentally investigate the impact that competing for funds has on the risk-taking behavior of laboratory portfolio managers compensated through an option-like scheme according to which the manager receives (most of) the compensation only for returns in excess of pre-specified strike price. We find that such a competitive environment and contractual arrangement lead, both in theory and in the lab, to inefficient risk taking behavior on the part of portfolio managers. We then study various policy interventions, obtained by manipulating various aspects of the competitive environment and the contractual arrangement, e.g., the Transparency of the contracts offered, the Risk Sharing component in the contract linking portfolio managers to investors, etc. While all these interventions would induce portfolio managers, at equilibrium, to efficiently invest funds in safe assets, we find that, in the lab, Transparency is most effective in incentivising managers to do so. Finally, we document a behavioral "Other People's Money" effect in the lab, where portfolio managers tend to invest the funds of their investors in a more risky manner than their Own Money, even when it is not in either the investors' or the managers' interest to do so.

    Original languageEnglish (US)
    Pages (from-to)1-22
    Number of pages22
    JournalExperimental Economics
    DOIs
    StateAccepted/In press - 2013

    Fingerprint

    Managers
    Experimental study
    Investors
    Risk-taking behavior
    Transparency
    Competitive environment
    Risk sharing
    Policy intervention
    Assets

    Keywords

    • Competition for funds
    • Contracts
    • Experiments

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance (miscellaneous)

    Cite this

    An experimental study of the impact of competition for Other People's Money : the portfolio manager market. / Agranov, Marina; Bisin, Alberto; Schotter, Andrew.

    In: Experimental Economics, 2013, p. 1-22.

    Research output: Contribution to journalArticle

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