Heterogeneity in the Sensitivity to Dynamic Incentives

Recent research suggests that herding behavior of individual investors can be a source of amplified volatility in financial markets and hence partially explain their inherent instability. Investigating the role of peer effects in financial decision making, i.e. how financial decisions are affected by the behavior of socially connected individuals, has therefore recently become an active field of research in behavioral finance.

Given the extensive evidence on the general existence of peer effects in other settings, it is arguably not the key issue to show that peers affect financial decisions but rather to explore the actual mechanisms underlying these phenomena. One particular relevant mechanism through which peer effects can unfold are rank incentives, i.e. benefits based on relative as compared to absolute performance. While in many aspects of financial markets such rank incentives can be elements of compensation schemes or implicitly matter through career concerns, evidence from behavioral economics suggests that individuals also have a strong intrinsic motivation to perform well in relative terms.

In this project, we explicitly investigate the heterogeneity of the strength of such intrinsically driven rank incentives that is the sensitivity to relative performance feedback. In particular, we study whether this sensitivity is an individual-specific trait rather than a mere contextual artefact. Put differently, we ask whether there are certain types of individuals that are fundamentally more prone to be affected by peer behavior than others. We conduct laboratory experiments in order to identify the relation between individual characteristics and behavior in dynamic contest environments