A Study of How Pursuit of Wealth Rank Distorts Risk Preferences
Gakushuin Economic Papers 55:4, 155-172 (2019)
19 Pages Posted: 25 Mar 2019
Date Written: February 1, 2019
We theoretically explore the risk-taking behavior of two unequally-endowed risk-neutral agents who are presented with opportunities to play lotteries. We find that if the agents consider rank in the wealth distribution more important than wealth itself, then their risk preferences are distorted in a way that lowers their expected income, raises inequality and increases wealth-rank mobility. In equilibrium, the rich agent avoids some positive expected return lotteries and both agents gamble on some negative expected return lotteries. We simulate and graph equilibrium strategies to visualize how trying to get richer differs from trying to be richer than someone else.
Keywords: wealth rank, risk-taking, gambling, positional competition, relative income
JEL Classification: C73, D31, D81, G11
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