Effects of Social Information on Risk Taking and Performance: Understanding Others’ Decisions vs. Comparing Oneself with Others in Short-Term Performance

When a problem leaves decision makers uncertain as to how to approach it, observing others’ decisions can improve one’s own decisions by promoting more accurate judgments and a better insight into the problem. However, observing others’ decisions may also activate motives that prevent this potential from being realized, for instance, ego concerns that prompt excessive risk taking. Our experimental study investigates how two features of the social environment influence the effect of observing others’ decisions on individual risk taking and performance. We manipulated (1) the psychological distance to others whose decisions could be observed (and thereby the tendency to seek self-enhancing social comparison) and (2) the opportunity for interaction (and thereby for a cumulative effect of any such tendency on decisions over time and for an effect on social information itself). Because the two features covary in real-world settings, we designed two treatments corresponding to the two natural combinations. Both treatments provided participants with two other participants’ period decisions in a multiperiod problem under uncertainty. No new objective information about the problem could be inferred from these decisions. We predicted that participants who observed the decisions of distant others (who had solved the same problem earlier) would perform better than participants in a control sample without any information about others’ decisions and that participants who observed the decisions of proximal others (with whom interaction could arise) would take more risk and perform worse than those who observed distant others’ decisions. The data corroborate our predictions. We discuss implications for organizational learning.

The gift that keeps on giving: corporate giving and excessive risk-taking

Corporations have recently started incorporating employees’ prosocial preferences into their incentive schemes, including charitable donations (corporate giving). These donations are mainly discussed in conjunction with the external effects of a firm’s CSR strategy. However, this experiment examines the effect of donations on internal firm operations. Specifically, we investigate whether the presence and structure of corporate giving influences employees’ excessive risk-taking. Such prosocial activities may remediate misaligned incentives often cited as drivers for employees to take excessive risks. Contrary to widespread practice, our experimental evidence suggests that firms could constrain employees' excessive risk-taking by linking existing contributions to project rather than corporate performance, thus providing boundaries around an employee’s involvement in CSR initiatives. We identify project-level giving as an unexplored CSR benefit and infer that personal responsibility effectively changes an employee’s incentive package. Our findings suggest an inverted U-shape curve of effectiveness.

Failure of Lehman Brothers

This study assessed the failure of the Lehman brothers. The aim was to evaluate the causes of Lehman's bankruptcy and determine the strategies that could prevent bankruptcy in the banking sector going forward. Findings indicated a close relationship between regulations and the actions of management. In particular, the failure of Lehman showed that regulation and supervision are critical to the success and continuity of the banking sector. The analysis also showed that the demise of Lehman was a result of complex factors. These included unethical management practices, deregulation, excessive risk-taking, poor corporate governance structure, fraud, and lack of a robust ethics code. Keywords: Derivatives, Hedging, Subprime Mortgage, Bankruptcy.

Adolescent risk-taking and social influence in the context of exploration

Adolescents are often described as a strange and different species that behaves like no other age group, typical behaviours being excessive risk-taking and sensitivity to peer influence. Different theories of adolescent behaviour attribute this to different internal mechanisms like undeveloped cognitive control, higher sensation-seeking or extraordinary social motivation. Many agree that some of adolescent risk-taking behaviour is adaptive. Here we argue that to understand adolescent risk-taking, and why it may be adaptive, research needs to pay attention to the adolescent environments’ structure and view adolescents as learning and exploring agents in it. We identify three unique aspects of the adolescent environment: 1) the opportunities to take risks are increased significantly, 2) these opportunities are novel and their outcomes uncertain, and 3) peers become more important. Next, we illustrate how adolescent risk-taking may emerge from learning using agent-based modelling, and show that a typical inverted-U shape in risk-taking may emerge in absence of a specific adolescent motivational drive for sensation-seeking or sensitivity to social information. The simulations also show how risky exploration may be necessary for adolescents to gain long-term benefits in later developmental stages and that social learning can help reduce losses. Finally, we discuss how a renewed ecological perspective and the focus on adolescents as learning agents may shift the interpretation of current findings and inspire future studies.

Determination of Deposit Insurance Premium (LPS): Merton’s Option Theory with Co-Insurance Consideration

Indonesia is a developing country that implements a deposit insurance system. Deposit Insurance Agency or LPS is an Indonesian deposit insurance established in 2004, which is Indonesian still unfamiliar with LPS, both among researchers, and the general public. Almost all deposit insurance in every country including Indonesia has the same problem, the problem is how to calculate premiums and how to avoid moral hazard by banks, therefore in this study will discuss how to determine premiums from the development of Black-Scholes option theory (1973) conducted by Merton (1977). To prevent banks from engaging in moral hazard, co-insurance is considered in this study, which is banks take the risk to anticipate 'excessive risk-taking' behavior. that occurs if the value of the asset is smaller than value of the deposit after joining the insurance program. So it is expected to encourage banks to beware.

Using machine learning to predict the likelihood of future risk taking

Adolescents show more risk taking behavior than children and adults. Most adolescents do not experience adverse consequences of this increased risk taking behavior. However, excessive risk taking can result in long term adverse consequences. To better target prevention efforts at those adolescents who are at risk for excessive risk taking, these adolescents should be identified early. Here we first test which statistical approach is best suited to predict the likelihood of risk taking behavior. We use data from a large, three wave longitudinal sample with 298 participants between the ages of 8-25 at the first measurement. We compare out-of-sample prediction performance of three different forms of Ordinary Least Squares (OLS) regression models and a Least Absolute Shrinkage and Selection (LASSO) model. Results show that the LASSO model outperforms all three OLS regression models on out-of-sample prediction for prediction of risk taking two years later. Furthermore, we show how LASSO can be used to determine a criterion value of who is at risk for specific future behavior, in this case likelihood of excessive risk taking. This criterion value can be used for early identification of individuals at risk and can provide guidance on decisions about prevention efforts.

Do We Become More Cautious for Others When Large Amounts of Money Are at Stake?

A considerable proportion of financial decisions are made by agents acting on behalf of other people. Although people are more cautious for others when making medical decisions, this does not seem to be the case for economic decisions. However, studies with large amounts of money are particularly absent from the literature, which precludes a clear comparison to studies in the medical domain. To address this gap, we investigated the effect of outcome magnitude in two experiments where participants made choices between safe and risky options. Decision-makers were not more cautious for others over large amounts. In fact, risk-taking was accentuated for large amounts in the gain domain. We did not find self-other differences in the loss domain for either outcome magnitude. This suggests that the caution observed in medical decisions does not replicate in financial decisions with large amounts, or at least not in the same way. These results echo the concerns that have been raised about excessive risk-taking by financial agents.

Relative Deprivation and Hope: Predictors of Risk Behavior

The belief that one is in a worse situation than similar others (Relative Deprivation) has been associated with involvement in a range of maladaptive escape behaviors, including excessive risk taking. Yet not everyone scoring high on measures of relative deprivation makes maladaptive choices. We hypothesized that hope may ameliorate the negative effects of relative deprivation. In two laboratory-based experiments using a novel risk-taking task (N = 101) we show that hope reduces risk-taking behavior in relatively deprived participants. A third study (N = 122) extended the moderating effect of hope on relative deprivation to real-world risk behavior; increased hope was associated with decreased likelihood of loss of control of one’s gambling behavior in relatively deprived individuals. Nurturing hope in relatively deprived populations may protect them against maladaptive behaviors with potential applications for harm reduction.

Copy Trading

Copy trading allows traders in social networks to receive information on the success of other agents in financial markets and to directly copy their trades. Internet platforms like eToro, ZuluTrade, and Tradeo have attracted millions of users in recent years. The present paper studies the implications of copy trading for the risk taking of investors. Implementing a novel experimental financial asset market, we show that providing information on the success of others leads to a significant increase in risk taking of subjects. This increase in risk taking is even larger when subjects are provided with the option to directly copy others. We conclude that copy trading leads to excessive risk taking. This paper was accepted by Axel Ockenfels, decision analysis.