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An experimental study of the impact of competition for Other People’s Money: the portfolio manager market

Published online by Cambridge University Press:  14 March 2025

Marina Agranov ,
Alberto Bisin  and
Andrew Schotter
Marina Agranov*
Affiliation:
California Institute of Technology, Pasadena, CA, USA
Alberto Bisin
Affiliation:
New York University, 19W 4th Street, New York, NY 10012, USA
Andrew Schotter
Affiliation:
New York University, 19W 4th Street, New York, NY 10012, USA
*
[email protected]
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Abstract

In this paper we experimentally investigate the impact that competing for funds has on the risk-taking behavior of laboratory portfolio managers compensated through an option-like scheme according to which the manager receives (most of) the compensation only for returns in excess of pre-specified strike price. We find that such a competitive environment and contractual arrangement lead, both in theory and in the lab, to inefficient risk taking behavior on the part of portfolio managers. We then study various policy interventions, obtained by manipulating various aspects of the competitive environment and the contractual arrangement, e.g., the Transparency of the contracts offered, the Risk Sharing component in the contract linking portfolio managers to investors, etc. While all these interventions would induce portfolio managers, at equilibrium, to efficiently invest funds in safe assets, we find that, in the lab, Transparency is most effective in incentivising managers to do so. Finally, we document a behavioral “Other People’s Money” effect in the lab, where portfolio managers tend to invest the funds of their investors in a more risky manner than their Own Money, even when it is not in either the investors’ or the managers’ interest to do so.

Keywords

ContractsExperimentsCompetition for funds

JEL classification

D86: Economics of Contract: Theory
Type
Original Paper
Information
Experimental Economics , Volume 17 , Issue 4 , December 2014 , pp. 564 - 585
Copyright
Copyright © 2013 Economic Science Association

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Footnotes

Electronic Supplementary Material The online version of this article (doi:https://doi.org/10.1007/s10683-013-9384-6) contains supplementary material, which is available to authorized users.

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