Relative Wealth Placement and Risk-Taking Behavior

Abstract

This study provides evidence that relative wealth placement substantially impacts risk-taking. We derive predictions on risk-taking in a standard portfolio problem in which individuals care about their placement in the wealth distribution relative to peers. In an incentivized laboratory experiment, we compare investment decisions between subjects who receive the same absolute endowment but who differ in relative wealth placement. Consistent with our theoretical predictions, we find that introducing information on other subjects' endowments significantly changes risk-taking; and individuals placed at the bottom (top) of their wealth distribution exhibit more (less) risk-taking--changing invested amounts by up to 50 percent.

Keywords: Decision-making under risk, social comparison, relative standing, risk preferences, last-place aversion

JEL Classification: C91, D63, D81, D91