The Effect of Compensation Caps on Risk-Taking

Author(s):  
Niklas Kreilkamp ◽  
Sascha Matanovic ◽  
Friedrich Sommer ◽  
Arnt Wöhrmann

Using an experiment, we investigate the joint effects of compensation caps and formal justification requirements on risk-taking. Compensation caps restrict the earnings potential of decision-makers and have been implemented to influence risk-taking behavior, especially after the financial crisis. Rational choice theory predicts that caps should restrict only risk-seeking decision-makers from taking undesired risk and not affect risk-averse decision-makers. Based on the compromise effect, however, we predict that compensation caps will also affect risk-averse decision-makers. Moreover, we posit that the effect of compensation caps on risk-averse decision-makers is stronger in the presence of high justification pressure. Our results support both hypotheses and indicate that compensation caps have unintended consequences. In particular, risk-averse decision-makers also take less risk when their compensation is capped, especially in combination with justification requirements, which are another frequently used instrument to steer risk-taking. The result might be dysfunctionally low levels of risk-taking for exploiting entrepreneurial opportunities.

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Daniel Pi

Abstract Skeptics of rational choice theory have long predicted that behavioral economics would radically transform the legislation, adjudication, and analysis of law. Using tort law as an exemplar, this Article maps out the narrow set of conditions where substantive law can be modified to accommodate irrational decision-makers. Specifically, this Article demonstrates that if injurers are systematically biased, and the due care standard can be expressed quantitatively, and victims are unable to take meaningful precautions, then imposing punitive damages can induce irrational injurers to exercise efficient precautionary care. In all other cases, it is better that the law adopt a presumption of rationality, regardless whether individuals behave rationally in fact.


2005 ◽  
Vol 27 (1) ◽  
pp. 5-31
Author(s):  
Frank Harvey

The strength of rational choice theory and the decision models derived from its axiomatic base (e.g., expected utility, game theory, deterrence, etc.) has always depended on the degree to which the theory's underlying assumptions offer at least a close approximation of reality. Proponents of political psychology have compiled what appears to be an impressive body of evidence against the utility of theories derived from these assumptions. Decision-makers, particularly in a time of crisis, are either unwilling or unable to live up to the demands of rationality. Conflicting empirical evidence from rational choice theorists continues to fuel the debate. In the absence of any attempt to identify areas of consensus, theoretical progress on the question of how to effectively manage international crisis mil remain elusive. In the conviction that this ongoing debate has become counterproductive to the development of crisis management theory, the following paper attempts, in part, to identify areas of consensus and to develop an alternative research agenda around Prospect Theory.


2019 ◽  
Author(s):  
Linda W. Chang ◽  
Samuel J. Gershman ◽  
Mina Cikara

Decision-makers consistently exhibit violations of rational choice theory when they choose among several alternatives in a set (e.g., failing to buy the best product in a set when it is presented alongside high-quality alternatives). Many of society’s most significant social decisions similarly involve the joint evaluation of multiple candidates. Are social decisions subject to the same violations, and if so, what account best characterizes the nature of the violations? Across five studies, we tested whether decision-makers exhibit context-dependent preferences in hiring scenarios and past U.S. congressional race outcomes and co¬mpared different models of value coding as sources of the hypothesized context-dependence. Studies 1a, 1b, and 1d revealed that a divisive normalization value coding scheme best characterized participants’ choices across a series of hiring decisions, and that participants exhibited context-dependent preferences. However, the distractor had the opposite effect of that predicted by divisive normalization once we accounted for the random effect of participant: as the value of the distractor increased, participants were more likely to hire the highest-valued candidate. In Study 2, we used a combination of archival electoral data and survey data to examine whether normalization models could explain the outcomes of congressional elections. Electoral outcomes were predicted by political candidates’ inferred competence, but this time in line with the divisive normalization account. Our findings offer mixed support for a formal, neurobiologically-derived account of when and how specific alternatives exert their effects on social evaluation and choice and highlight conditions under which high-value distractors increase versus decrease relative choice accuracy.


2004 ◽  
Vol 18 (1) ◽  
pp. 53-66 ◽  
Author(s):  
Jacob M. Rose ◽  
Anna M. Rose ◽  
Carolyn Strand Norman

This research proposes that the risk preferences of decision evaluators and the decision “domain” systematically influence evaluations of decision makers' information technology (IT) investment decisions. Results of an experiment with 160 M.B.A. student participants indicate that risk-seeking evaluators rate IT investment decisions higher than do risk-averse evaluators. Further, decision evaluators are influenced by the gain and loss decision domains when evaluating a decision maker's risky information technology investment decisions. The findings indicate that providing decision domain information to decision evaluators leads to systematic differences in IT investment evaluations. A key contribution of this study is the discovery of the relevance of prospect theory to IT evaluation processes.


2020 ◽  
Vol 10 (5) ◽  
pp. 20200002 ◽  
Author(s):  
Trisha R. Shrum ◽  
Ezra Markowitz ◽  
Holly Buck ◽  
Robin Gregory ◽  
Sander van der Linden ◽  
...  

The adoption of carbon dioxide removal (CDR) technologies at a scale sufficient to draw down carbon emissions will require both individual and collective decisions that happen over time in different locations to enable a massive scale-up. Members of the public and other decision-makers have not yet formed strong attitudes, beliefs and preferences about most of the individual CDR technologies or taken positions on policy mechanisms and tax-payer support for CDR. Much of the current discourse among scientists, policy analysts and policy-makers about CDR implicitly assumes that decision-makers will exhibit unbiased, rational behaviour that weighs the costs and benefits of CDR. In this paper, we review behavioural decision theory and discuss how public reactions to CDR will be different from and more complex than that implied by rational choice theory. Given that people do not form attitudes and opinions in a vacuum, we outline how fundamental social normative principles shape important intergroup, intragroup and social network processes that influence support for or opposition to CDR technologies. We also point to key insights that may help stakeholders craft public outreach strategies that anticipate the nuances of how people evaluate the risks and benefits of CDR approaches. Finally, we outline critical research questions to understand the behavioural components of CDR to plan for an emerging public response.


2019 ◽  
Vol 5 (4) ◽  
pp. 280-294
Author(s):  
Robert Francis Hesketh

Purpose The purpose of this paper is to disseminate street gang research by Hesketh (2018) that has identified a major aspect of young disenfranchised people’s attraction to street gangs as edgework risk-taking. The study which sought to identify differences between those who joined street gangs compared to those who abstained on Merseyside. Design/methodology/approach Two samples were taken from locations within the five boroughs of Merseyside, the first comprising of 22 participants (18–25) involved in street gangs as active and ex-members with a second sample consisting of 22 participants (18–25) who had completely abstained from street gang membership. Data were collected through adoption of biographic narrative interpretive method (BNIM) (Wengraf, 2001), with analysis taking the form of Strauss and Corbin’s (1990) version of grounded theory. Findings Of the many findings that surrounded what was identified as the core category/central phenomena of “coping with limited opportunity” it emerged that marginalisation and austerity were contributing to increasing inequality and institutional constraint on young people on Merseyside. As a result, many of the 18–25 year young men felt powerless, lacking identity and aspirational drive. Joining a gang thus became not only a way in which control was seized back from such constraint through criminal risk-taking behaviour, what Lyng (1990) has termed “edgework”, but also a means in which many of the young men interviewed gained an identity of being “bad” from which intrinsically pleasurable seductive and criminally erotic sensations were derived (Katz, 1988). Moreover, a relatively new version of edgework was also identified, even though by way of male testimony. Called “vicarious edgework”, the phenomena sees young women drawn to male gang members (“bad boys”) to derive the excitement of risk indirectly while remaining law abiding. In sum, the paper highlights a concerning socio-psychological and key motivating driver triggered by marginalisation. Research limitations/implications Study samples were all male. Thus, any observations on the vicarious edgework aspect of risk taking requires further research involving both young men and women. Practical implications The paper highlights the need for more understanding of the allure of risk-taking. The paper identifies a new form of female edgework. The paper draws attention to gang membership and non-membership on Merseyside, an area that has been greatly neglected by gangs’ studies in the UK. The paper describes a novel way of data collection using an adoption of BNIM. Social implications In sum, the paper highlights a concerning socio-psychological and key motivating driver triggered by marginalisation. This, the author contends has been largely neglected by risk factor focussed interventions that largely concentrate on the idea of rational choice theory and sociological positivism. Originality/value The paper attempts to disseminate original street gang research by Hesketh (2018) that has identified a major aspect of young disenfranchised people’s attraction to street gangs as edgework risk-taking.


2018 ◽  
Vol 30 (2) ◽  
pp. 220-246
Author(s):  
Christoph Engel ◽  
Werner Gueth

Decision-makers often mean to react to the behavior of others, knowing that they only imperfectly observe them. Rational choice theory posits that they should weigh false positive versus false negative choices, and assess possible outcomes and their probabilities, if necessary, attaching subjective values to them. We argue that this recommendation is not only utterly unrealistic but highly error prone. We contrast it with an approach inspired by satisficing, where the decision-maker contents herself with gauging her confidence in not making too big a mistake by adopting one course of action. We model the competing approaches, using judicial decision-making as a graphic illustration.


1999 ◽  
Vol 27 (4) ◽  
pp. 421-429 ◽  
Author(s):  
T. J. Kamalanabhan ◽  
D. L. Sunder

It is generally believed that managers are more risk-taking than others. However research has shown managers to be both risk-averse and risk-seeking, depending on the target performance or reference points. The present study is an attempt to see if managers differ from others in risktaking propensity. Managers, non-managerial employees and MBA students from different organisations in Madras were administered the CDQ and modified Risk-in-Basket. Results of ANOVA and Chi-square analysis show that managers, potential managers (M.B.A. students), and non-managerial employees do not differ significantly in risk-taking as measured by the instruments used. The study concludes on the note that managers may be attributed higher risktaking due to their ability and that what is really expected from our managers is successful risktaking, rather than more risk-taking.


2020 ◽  
Vol 12 (12) ◽  
pp. 5096 ◽  
Author(s):  
Mohammad A. Alsharif ◽  
Michael D. Peters ◽  
Timothy J. Dixon

Saudi Arabia is a developing country that is experiencing a rapid growth in its population and level of urbanisation. Higher education (HE) in the country has developed rapidly over the last ten years, and it is still moving through numerous major reforms. Largely, the concept of sustainability has not yet been formally adopted in public institutions in a way that could sufficiently remedy the range of activities that currently impact negatively on the environment. The central aim of this paper is to examine the extent to which planning and action for sustainability is currently being taken on university campuses in Saudi Arabia, and to review the opportunities and challenges for encouraging and enabling further progress to this end. The research that the paper draws on specifically investigated the influence of decision makers’ personal knowledge and perceptions within Facilities and Project Management (FPM) departments at selected Saudi universities, and the constraints faced by FPM decision makers with regard to the promotion of sustainability on campus. This exploration was supported by the development of a theoretical framework that draws on rational choice theory (RCT). The research revealed mixed levels of prevailing knowledge and awareness towards sustainability among FPM decision makers within the case study university campuses. Cost notably came across as a dominant influence on FPM decision makers’ choices and decisions, and it undoubtedly plays an important role in shaping the decision-making process alongside other key organisational factors. A number of barriers facing the incorporation of sustainability emerged with clarity, such as the lack of supportive leadership, the lack of sustainability knowledge and awareness among senior management and an absence of sustainability-related legislation policy or strategic direction in the HEIs concerned.


Author(s):  
Timothy R. Koski ◽  
Craig R. Ehlen

According to prospect theory (Kahneman and Tversky 1979), decision makers perceive outcomes as gains or losses from a reference point and behave differently depending on how the outcome is framed. Decision makers will be risk-averse if the perceived outcome is viewed as a gain and risk-seeking if it is perceived as a loss. Research applying prospect theory to the decision-making of tax preparers by using their clients year-end payment status as the reference point has not been successful (see e.g., Duncan et al. 1988; Sanders and Wyndelts 1989; LaRue and Reckers 1989). One possible explanation for the lack of consistent results in this area is that tax preparers do not internalize the framing of their clients payment status and thus do not have a psychological commitment to the decision outcome. It is the client who is in a gain or loss position, not the tax preparer.This paper reports the results of an experiment applying prospect theory and psychological commitment to tax preparer decision-making. We hypothesized that tax preparers personal involvement in placing their client in a particular year-end tax situation (payment due or refund) will cause them to use the clients year-end payment status as the reference point and to behave in a manner consistent with the predictions of prospect theory. In particular, we hypothesized that personal involvement in placing their client in a year-end payment due situation will cause tax preparers to frame the decision as a loss and thus behave in a risk-seeking manner. We also hypothesized that personal involvement in placing their client in a year-end refund situation will cause tax preparers to frame the decision as a gain and engage in more risk-averse behavior than tax preparers not so involved.Using a sample of 104 professional tax return preparers, we found no evidence that psychological commitment to their clients year-end payment status caused tax preparers to behave in a manner consistent with prospect theory. We did, however, find evidence that more experienced tax preparers took more aggressive tax-reporting positions than those with less experience. We also found that males took more aggressive tax-reporting positions than females.


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