Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket?

35 Pages Posted: 21 Jul 2009 Last revised: 11 Nov 2022

See all articles by Michael Schwarz

Michael Schwarz

Yahoo! - Yahoo! Research Labs; National Bureau of Economic Research (NBER)

Sergei Severinov

Duke University, Fuqua School of Business-Economics Group

Date Written: July 2009

Abstract

In this paper we study "investment tournaments," a class of decision problems that involve gradual allocation of investment among several alternatives whose values are subject to exogenous shocks. The decision-maker's payoff is determined by the final values of the alternatives. An important example of career tournaments motivating our research is the career choice problem, since a person choosing a career often starts by investing in learning several professions. We show that in a broad range of cases it is optimal for the decision-maker in each time period to allocate all resources to the most promising alternative. We also show that in tournaments for a promotion the agents would rationally put forth a higher effort in an early stage of the tournament in a bid to capture a larger share of employer's investment, such as mentoring.

Suggested Citation

Schwarz, Michael and Severinov, Sergei, Investment Tournaments: When Should a Rational Agent Put All Eggs in One Basket? (July 2009). NBER Working Paper No. w15136, Available at SSRN: https://ssrn.com/abstract=1434650

Michael Schwarz (Contact Author)

Yahoo! - Yahoo! Research Labs ( email )

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National Bureau of Economic Research (NBER)

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Sergei Severinov

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
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United States
919-660-7926 (Phone)
919-660-7971 (Fax)

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