Rank matters-The impact of social competition on portfolio choice

- We analyze how tournament incentives influence risk-taking and portfolio choice.
- Our experiment further investigates whether behavior is driven by social competition.
- The results suggest that subjects' behavior depends on past over- or underperformance.
- Subjects' behavior is mainly driven by social status concerns for higher rank.
- Monetary tournament incentives are of minor importance.

Tournament incentives' schemes have been criticized for inducing excessive risk-taking among financial market participants. In this paper we investigate how relative performance-based incentive schemes and status concerns for higher rank influence portfolio choice in laboratory experiments. We find that both underperformers and over-performers adapt their portfolios to their current relative performance, preferring either positively or negatively skewed assets, respectively. Most importantly, these results hold both when relative performance is instrumental for higher payoffs in a tournament and when it is only intrinsically motivating and not payout-relevant. We find no effects when no relative performance information is given.