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Risk Preferences and Misconduct: Evidence from Politicians

Dylan Minor ()
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Dylan Minor: Harvard Business School, Strategy Unit

No 16-073, Harvard Business School Working Papers from Harvard Business School

Abstract: When seeking new leaders, business and government organizations alike often need individuals that are less risk averse, or even risk-seeking, in order to improve performance. However, individuals amenable to increased risk-taking may be more likely to engage in misconduct. To study this issue, we explore US political scandals and the implicated politicians' portfolio choices. We find that a politician allocating all of her portfolio to risky investments has double the odds of being involved in a political sandal compared to a politician allocating all of her portfolio to safe investments. This suggests that those who are more willing to take risks in their personal finances are also more likely to engage in misconduct. We validate portfolio choice as a measure of risk preferences by correlating actual high-stakes investment choices (average $700,000 US) to conventional laboratory lottery choices (average $51 US) of wealthy investors.

Pages: 34 pages
Date: 2016-01
New Economics Papers: this item is included in nep-cbe, nep-pol and nep-upt
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