australieen
Rankings and risk-taking in the financial industry

Rankings and risk-taking in the financial industry

20-09-2017 | From the field
Rankings matter. For example, we already know that most money flows towards top-performing funds at a certain point in time. This encourages so called “tournament” behavior among mutual fund managers. At Robeco, we believe that although this pattern is understandable, it may distort asset prices, in particular driving up the prices of risky assets. In this study*, professor Utz Weitzel and his colleagues ran laboratory experiments with more than 1,000 participants, including students and investment professionals.
  • Pim  van Vliet, PhD
    Pim
    van Vliet, PhD
    Head of Conservative Equities and Quant Allocation

They found that rankings and tournament incentives increase risk-taking among underperforming professionals, but not among students. One reason could be that professionals know that following a low-risk strategy does not increase the likelihood of a fund achieving high rankings, while a high-risk strategy makes more sense under these conditions. This behavior supports the persistence of the low-risk anomaly.

The paper is also of particular interest since most other empirical studies are based on samples of students, who might not be representative for professional investors. Many experiments involving students may underestimate the behavioral impact of incentives.

*‘Rankings and Risk-Taking in the Finance Industry’, Michael Kirchler, Florian Lindner and Utz Weitze, 2017.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates
Subscribe
From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others.

Read all articles

Disclaimer

BY CLICKING ON “I AGREE”, I DECLARE I AM A WHOLESALE CLIENT AS DEFINED IN THE CORPORATIONS ACT 2001.

What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity:

  • who holds an Australian Financial Services License
  • who has or controls at least $10 million (and may include funds held by an associate or under a trust that the person manages)
  • that is a body regulated by APRA other than a trustee of:
    (i) a superannuation fund;
    (ii) an approved deposit fund;
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme.
    within the meaning of the Superannuation Industry (Supervision) Act 1993
  • that is a body registered under the Financial Corporations Act 1974.
  • that is a trustee of:
    (i) a superannuation fund; or
    (ii) an approved deposit fund; or
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme
    within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of at least $10 million.
  • that is a listed entity or a related body corporate of a listed entity
  • that is an exempt public authority
  • that is a body corporate, or an unincorporated body, that:
    (i) carries on a business of investment in financial products, interests in land or other investments; and
    (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of section 82 of the Corporations Act 2001, the terms of which provided for the funds subscribed to be invested for those purposes.
  • that is a foreign entity which, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.
I Disagree