Myopic risk-taking in tournaments

• We run a controlled laboratory experiment on risk-taking and incentives.
• We investigate how the period over which returns are evaluated affects risk-taking.
• Evaluation period affects risk-taking differently under different incentive regimes.
• In tournaments, investors tend to take more risk the more frequently returns are evaluated.
• The results indicate that myopia may trigger risk-taking under tournament incentives.

There is a common notion that incentive schemes in the financial industry trigger myopia and risk-taking. In some sense this contrasts with the concept of myopic loss aversion (MLA), which implies that myopia mitigates risk-taking. A number of experimental studies support the MLA-hypothesis by showing that people take less risk the more frequently their investments are evaluated. In this paper we show experimentally that if subjects are exposed to tournament incentives, the standard MLA effect disappears. Rather, there is a tendency towards more risk-taking the more frequently investments are evaluated.