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Do markets encourage risk-seeking behaviour?

Friederike Mengel and Ronald Peeters ()

No 42, Research Memorandum from Maastricht University, Graduate School of Business and Economics (GSBE)

Abstract: Excessive risk taking in markets can have devastating consequences as recent financial crises have high-lighted. In this paper we ask whether markets as an institution encourage such excessive risk taking. To establish causality, we isolate the effects of market interaction in a laboratory experiment keeping otherpossibly confounding factors constant. We find that the opposite is true. Markets decrease participants willingness to take risks. This finding can be explained by social comparison utility in the presence of negatively correlated risks and we provide evidence for such a mechanism.

Keywords: Institutions: Design, Formation, and Operations; Behavioral Economics: Underlying Principles (search for similar items in EconPapers)
JEL-codes: D02 D03 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-upt
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
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