Heterogeneity in the Sensitivity to Dynamic Incentives

Project Start:01/2018
Status:Completed
Researchers:Florian Hett, Felix Schmidt
Category: Household Finance, Experiment Center
Funded by:LOEWE

Recent research suggests that herding behavior of individual investors can be a source of amplified volatility in financial markets and hence also 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 explicitly hard-coded in 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 then assess the possibility to actually measure this heterogeneity using a behavioral measure of “competitiveness”, i.e. a general tendency to be attracted by competitive environments.

We plan to conduct laboratory experiments in order to identify the relation between individual characteristics (ability and competitiveness) and behavior in dynamic contest environments. The hypothesis is that differences in competitiveness, as measured in our experiment, explain behavioral heterogeneity in the reaction to dynamic incentives and relative performance feedback and thus help to understand differential effects of rank incentives in the field.

 

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
203Florian Hett, Felix SchmidtPushing Through or Slacking Off? Heterogeneity in the Reaction to Rank Feedback2018 Household Finance, Experiment Center heterogeneity, competitiveness; contest; rank feedback, relative performance evaluation
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