Gambling in Risk-Taking Contests: Experimental Evidence

70 Pages Posted: 25 Sep 2020 Last revised: 31 Jul 2023

See all articles by Matthew Embrey

Matthew Embrey

University of Sussex, Department of Economics

Christian Seel

Maastricht University

J. Philipp Reiss

Karlsruhe Institute of Technology

Date Written: July 31, 2023

Abstract

This paper experimentally investigates excessive risk taking in contest schemes by implementing a stopping task based on Seel and Strack (2013). In this stylized setting, managers with contest payoffs have an incentive to delay halting projects with a negative expectation, with the induced inefficiency being highest for a moderately negative drift. The experiment systematically varies the negative drift (between-subjects) and the payoff incentives (within-subject). We find evidence for excessive risk taking in all our treatment conditions, with the non-monotonicity at least as problematic as predicted. Contrary to the theoretical predictions, this aggregate pattern of behaviour is seen even without contest incentives. Further analysis suggests that many subjects display behaviour consistent with some intrinsic motivation for taking risk. This intrinsic motive and the strategic motive for excessive risk taking reinforce the non-monotonicity. The experiment uncovers a behavioural nuance where contest incentives crowd out an intrinsic inclination to gamble.

Keywords: Contests, Relative performance pay, Risk-taking Behaviour, Laboratory Experiment

JEL Classification: C72, C92, D81

Suggested Citation

Embrey, Matthew and Seel, Christian and Reiss, J. Philipp, Gambling in Risk-Taking Contests: Experimental Evidence (July 31, 2023). Available at SSRN: https://ssrn.com/abstract=3668143 or http://dx.doi.org/10.2139/ssrn.3668143

Matthew Embrey (Contact Author)

University of Sussex, Department of Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

HOME PAGE: http://www.sussex.ac.uk/economics/people/peoplelists/person/363998

Christian Seel

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands
0031 433883651 (Phone)

J. Philipp Reiss

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

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