Winning ways: How rank-based incentives shape risk-taking decisions

57 Pages Posted: 7 Jun 2024 Last revised: 7 Apr 2025

See all articles by Dawei Fang

Dawei Fang

University of Gothenburg - Center For Finance; University of Gothenburg - Department of Economics

Changxia Ke

Queensland University of Technology

Gregory Kubitz

Queensland University of Technology

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Lionel Page

Queensland University of Technology

Yang Liu

University of Melbourne

Date Written: June 06, 2024

Abstract

Risk-taking spurred by rank-based contest rewards can have enormous consequences, from breakthrough innovations in research competitions to hedge fund collapses engendered by risky bets aimed at raising league-table rankings. This paper provides a novel theoretical and experimental framework of rank-motivated risk-taking that both allows for complex prize structures and permits participants to make arbitrary mean-preserving changes to their random performance. As predicted by our theory, participants choose positively skewed performance under highly convex prize schedules and negatively skewed performance under concave ones. Convexifying the prize schedule or increasing competition for identical winner prizes induces riskier and more skewed performance.

Keywords: risk taking, skewness, rank incentives, contest structure

JEL Classification: C72, C91, D74, D81

Suggested Citation

Fang, Dawei and Ke, Changxia and Kubitz, Gregory and Noe, Thomas H. and Page, Lionel and Liu, Yang, Winning ways: How rank-based incentives shape risk-taking decisions (June 06, 2024). Available at SSRN: https://ssrn.com/abstract=4856341 or http://dx.doi.org/10.2139/ssrn.4856341

Dawei Fang (Contact Author)

University of Gothenburg - Center For Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

University of Gothenburg - Department of Economics ( email )

Sweden

Changxia Ke

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Gregory Kubitz

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Thomas H. Noe

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Lionel Page

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Yang Liu

University of Melbourne ( email )

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