Ranking Games and Gambling: When to Quit When You're Ahead

Edward Anderson ()
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Edward Anderson: University of Sydney Business School, University of Sydney, Sydney NSW 2006, Australia

Operations Research, 2012, vol. 60, issue 5, 1229-1244

Abstract: It is common for rewards to be given on the basis of a rank ordering, so that relative performance amongst a cohort is the criterion. In this paper we formulate an equilibrium model in which an agent makes successive decisions on whether or not to gamble and is rewarded on the basis of a rank ordering of the final position amongst competing players. One application of this model is to the behavior of mutual fund managers who are paid depending on funds under management, which in turn are greatly influenced by annual or quarterly rank orderings. Our model deals with a situation in which fund managers can elect either to pick stocks or to use a market-tracking strategy. In equilibrium the distribution of the final position will have a negative skew. We explore how this distribution depends on the number of players, the probability of success when gambling, the structure of the rewards, and on information regarding the performance of other players.

Keywords: ranking games; tournaments; negative skew; prize structure (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:60:y:2012:i:5:p:1229-1244

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