Rank Matters - The Impact of Social Competition on Portfoilio Choice

Incentive schemes resulting in tournament competition have been criticized for inducing excessive risk-taking among financial market participants. In this paper we investigate the influence of relative performance-based incentive schemes on risk-taking and portfolio choice. In particular, we focus on whether both variables are influenced by an instrumental or an intrinsic concern for high rank. We find that both underperformers and over-performers adapt their portfolios to their current relative performance, preferring either positively or negatively skewed assets, respectively. Remarkably, these results hold both when relative performance is instrumental for higher payoffs (Treatment TOURNAMENT) and when it is only intrinsically and not payout-relevant (Treatment SOCIAL). We find no effects when no relative performance information is given (Treatment INDIVIDUAL). We further report no difference in the preference for idiosyncratic or correlated assets between over- and underperformers in all treatments