The impact of experience on risk taking, overconfidence, and herding of fund managers: Complementary survey evidence

Empirical research has shown that inexperienced fund managers yield significantly higher returns than their more experienced colleagues. If the portfolios of inexperienced are not more risky, this result would contradict the hypothesis of market efficiency. Therefore, it is an important question whether inexperienced fund managers tend to taker higher risks. Higher risk taking may be explained by a higher degree of overconfidence, less herding behavior, or a lower degree of risk aversion. Since the results concerning the relationship between experience and risk taking in previous studies are rather contradictory we provide complementary survey evidence of 117 German fund managers which can improve our understanding in this field. In line with the results of previous studies, we find that herding is decreasing with experience while the evidence concerning risk taking and overconfidence is mixed. Nevertheless, our results provide some support for the hypothesis that inexperienced managers do indeed take higher risks.     

Taxes,risk taking,and financial stability

After the global financial crisis, the use of taxes to enhance financial stability received new attention. This paper analyzes the corrective role of taxes in banking and compares two instruments, namely, an allowance for corporate equity (ACE), which mitigates the debt bias in corporate taxation, and a Pigovian tax on bank debt (bank levy). We emphasize financial stability gains driven by lower bank asset risk and develop a principal-agent model, in which risk taking depends on the bank's capital structure and, by extension, on the tax treatment of debt and equity. We find that (i) the ACE unambiguously reduces risk taking, (ii) bank levies reduce risk taking if they are independent of bank performance but may be counterproductive otherwise, and (iii) taxes are especially effective if regulatory capital requirements are constrained to low levels.     

Tipping the (Im)balance: Capital inflows,financial market structure,and banking crises

An emerging consensus among scholars and policy‐makers identifies foreign capital inflows as one of the primary determinants of banking crises in developed countries. We challenge this view by arguing that external imbalances are destabilizing only when banks face substantial competition from securities markets in the process of financial intermediation. We assemble a dataset of banking crises covering the advanced industrialized countries from 1976 to 2011 and find evidence of a conditional relationship between capital inflows, a well‐developed securities market, and the incidence of banking crises. We further explore the impact of capital inflows on banks’ actual risk taking as indicated by their capital adequacy levels and measures of insolvency risk. Our results demonstrate that prudential capital cushions tend to decline with the combination of capital inflows and prominent securities markets. We highlight the political decisions—often made during the early days of a country's financial development—that determine the relative prominence of banks vs. non‐bank financial institutions and conclude with policy recommendations.     

On eliciting beliefs in strategic games

Several recent studies in experimental economics have tried to measure beliefs of subjects engaged in strategic games with other subjects. Using data from one such study we conduct an experiment where our experienced subjects observe early rounds of strategy choices from that study and are given monetary incentives to report forecasts of choices in later rounds. We elicit beliefs using three different scoring rules: linear, logarithmic, and quadratic. We compare forecasts across the scoring rules and compare the forecasts of our trained observers to forecasts of the actual players in the original experiment. We find significant differences across scoring rules. The improper linear scoring rule produces forecasts closer to 0 and 1 than the proper rules, and these forecasts are poorly calibrated. The two proper scoring rules induce significantly different distributions of forecasts. We find that forecasts by observers under both proper scoring rules are significantly different from the forecasts of the actual players, in terms of accuracy, calibration, and the distribution of forecasts. We also find evidence for belief convergence among the observers.     

Pyramidal structure,risk‐taking and firm value

This article investigates the relationship among pyramidal layers, risk‐taking and firm value using a sample of local state‐owned enterprises (SOEs) in China. We find that state‐pyramidal layers have a positive and significant impact on firm risk‐taking and firm value, suggesting that the pyramidal structure formed by the state protects SOEs from political intervention. Risk‐taking is conducive to enhancing firm value and is one of the important channels through which state‐pyramidal layers increase firm value. By exploring the role of state‐pyramidal organizational structures in improving SOEs' risk‐taking, our results contribute to both corporate governance and corporate finance literature.     

Taking Chances: The Effect that Growing Up on Welfare Has on the Risky Behavior of Young People*

In this paper, we analyze the effect that growing up in a family with a history of welfare receipt has on young people's engagement in a variety of social and health risks. Unique administrative data matched to survey data for 18‐year‐olds and their mothers allow us to evaluate the effect of welfare receipt over the course of a young person's childhood. Much of the apparent link between family welfare history and risk taking disappears once we control for the effects of family structure, mothers’ own risk taking, and mothers’ investments in their children. We find no evidence that growing up on welfare causes young people to engage in risky behavior.     

Learning, teaching, and turn taking in the repeated assignment game

History-dependent strategies are often used to support cooperation in repeated game models. Using the indefinitely repeated common-pool resource assignment game and a perfect stranger experimental design, this paper reports novel evidence that players who have successfully used an efficiency-enhancing turn taking strategy will teach other players in subsequent supergames to adopt this strategy. We find that subjects engage in turn taking frequently in both the Low Conflict and the High Conflict treatments. Prior experience with turn taking significantly increases turn taking in both treatments. Moreover, successful turn taking often involves fast learning, and individuals with turn taking experience are more likely to be teachers than inexperienced individuals. The comparative statics results show that teaching in such an environment also responds to incentives, since teaching is empirically more frequent in the Low Conflict treatment with higher benefits and lower costs.     

Risk attitude and wage growth: replicating Shaw (1996)

We replicate Shaw (J Labor Econ 14(4):626–653, 1996) who found that individual wage growth is higher for individuals with greater preference for risk taking. Expanding her dataset with more American observations and data for Germany, Spain, and Italy, we find evidence that risk attitudes are relevant but support is mixed at best for the original specifications.     

JUDGING BIAS IN COMPETITIVE ACADEMIC DEBATE: THE EFFECTS OF REGION,SIDE, AND SEX

Debate is a “mind sport” that requires fair and impartial judging. This study examines debate rounds at the Tournament of Champions from 2004 to 2009. We use a binomial choice model to estimate the marginal effects of regional bias, sex bias, and side bias, using transitive predictions to control for idiosyncratic quality. We find evidence of region and side bias but not sex bias. These factors may explain the significant number of nontransitive outcomes in the data. Finally, we suggest some policy remedies to mitigate the impact of biases and further applications of our methodology. (JEL C25, J16, J52, J71, L83)     

HEDGING,SPECULATION, AND INVESTMENT IN BALANCE‐SHEET TRIGGERED CURRENCY CRISES*

This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure – caused by balance sheet effects as in Krugman (2000) – and therefore their investments’ sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e. hedging) or risk taking (i.e. speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.     

Adult mortality in Russia

This paper studies the determinants of Russian adult mortality controlling for both individual and household heterogeneity. We employ survival analysis and utilize 12 rounds of the Russian Longitudinal Monitoring Survey spanning a 14‐year period. Although confirming the crucial role of excessive alcohol consumption in shaping adult mortality risks in Russia, the results are original in several other respects. We find empirical support for the importance of relative status measured in non‐income terms in shaping mortality hazards. We find evidence of the influence of labour market behaviour, and sectoral and occupational mobility in particular, on longevity. The detrimental role of smoking to health is found to be comparable with the role of excess alcohol consumption, which is novel in the Russian context where the influence of smoking is typically downplayed in comparison with alcoholism. Finally, we find no micro evidence in support of the political economy view based on a positive correlation between low alcohol prices and high mortality rates found in regional‐level data.     

Storm Damage and Risk Preferences: Panel Evidence from Germany

Individuals’ risk preferences may change after experiencing external socio-economic or natural shocks. Theoretical predictions and empirical studies suggest that risk taking may increase or decrease after experiencing shocks. So far the empirical evidence is sparse, especially when it comes to developed countries. We contribute to this literature by investigating whether experiencing financial and health-related damage caused by storms affects risk preferences of individuals in Germany. Using unique panel data, we find that household heads were more risk-seeking after they experienced storm damage. We do not find evidence of exposure to storm per se (regardless of damage experience), which suggests that household heads have to suffer damage for their risk preferences to be affected. These results are robust across a battery of alternative model specifications and alternative storm damage measures (magnitude of financial damage). We rule out other potential explanations such as health-related and economic shocks. The self-reported storm damage data is broadly confirmed by regional storm damage data provided by the insurance industry. While we cannot identify the channels through which experiencing storm damage affects risk preferences from our data, we suggest and discuss some potential channels. The results may have important policy implications as risk preferences affect, for instance, individuals’ savings and investment behaviour, adoption of self-protection and self-insurance strategies, and technology adoption.     

International trade,foreign direct investments,and firms’ systemic risk : Evidence from the Netherlands

This paper measures the contribution of firms in the financial and non-financial sectors to systemic risk. We quantify systemic risk as possible risk spillovers from individual firms to the economy by taking into account time-varying linkages between the firm and the economy. Based on a novel dataset that combines data on international trade and foreign direct investments with daily stock data for 67 Dutch listed companies from 2006–2015, our results indicate that high systemic risk contributions are not only present in the financial sector, but also occur in other sectors of the economy. We find that firms within the financial sector are more capable than non-financial firms of reverting to their pre-financial crisis level of systemic risk contribution. Having examined the potential role globalization fulfills in determining systemic risk, we find two main opposing effects. First, firms in internationally trade-intensive sectors contribute less to systemic risk than firms in sectors with low trade intensity. Second, systemic risk rises when firms are engaged in foreign direct investment activity, suggesting that international networks and global supply chains contribute to systemic risk propagation. Our empirical results imply that macro-prudential policy aimed at monitoring systemic risk should be extended to non-financial sectors and should take into consideration globalization measures, such as foreign direct investments and global supply chains.     

宏观审慎政策、经济周期与银行风险承担*

本文基于中国227家商业银行2005－2016年非平衡面板数据，实证检验中国宏观审慎政策实施对于银行风险承担的影响。结果表明：宏观审慎政策增强会在一定程度上抑制银行风险承担，而且这种显著的负向关系并不随着银行风险代理变量、经营辐射范围以及是否有外资入股等条件的改变而发生变化。经济周期会对宏观审慎政策的有效性产生非对称性影响，即相比在经济上行时期，在经济下行时期的宏观审慎政策对银行风险承担的抑制作用更强且更为显著。就可能的影响机制而言，本文发现宏观审慎政策通过提高银行盈利能力，从而降低银行风险承担。       

Deregulation, market power and risk behaviour in Spanish banks

This paper provides empirical evidence on the effects of regulatory changes in the market power of Spanish banks. It also analyses the response of banks, in terms of risk-taking behaviour, as a result of a reduction in economic profits. We find that liberalisation measures have increased competition and eroded banks’ market power. We observe that banks with lower charter values tend to have lower equity-assets ratios (lower solvency) and to experience higher credit risk. The last evidence is new in the literature and calls for strengthening regulatory concerns about credit risk management by banks in situations of increased competition.     

Causal Effects of Paternity Leave on Children and Parents

Reserving a share of the parental leave period for fathers is considered necessary in order to induce fathers to take leave, and to increase men's participation in child‐rearing. We investigate how a parental leave reform directed towards fathers affected leave‐taking, and, in turn, children's and parents' long‐term outcomes. A paternal leave quota greatly increases the share of men taking paternity leave. We find evidence that children's school performance improves as a result, particularly in families where the father has higher education than the mother. We find no evidence that paternity leave counters the traditional allocation of parents' labor supply.     

Success in soccer and economic performance: Evidence from beŞİktaŞ-Turkey

This paper investigates the connection between Turkish industrial production growth and the success of Beşiktaş, which is a popular Turkish soccer team. The empirical evidence provided in the paper suggests that industrial production growth tends to increase with the success of Beşiktaş in European cups. Moreover, if the winnings are in displacement, the increase in industrial production is higher than if the winnings are in the home field. On the other hand, findings on the effects of domestic games on industrial performance are not statistically significant. All the views expressed in this paper belong to the authors and do not represent the views of the Central Bank of the Republic of Turkey or its staff. Beşiktaş, established in 1903, is one of the most popular soccer teams in Turkey. Detailed information about the team can be reached at http://www.besiktasjk.com     

Social responsibility promotes conservative risk behavior

Previous studies show that group risk taking can be more conservative than individual risk taking. Two common, but untested reasons for this greater caution are the influence of social responsibility and a tendency to conform to the preferences of others. We study changes in risk taking in simple settings, where another’s risk taking can sometimes be observed, and where decisions affect not only one’s own payoffs but sometimes also affect those of a passive, second party. We find that social responsibility leads to more conservative risk behavior in group decision making. Conformism has a more symmetric effect: observing the choice of another tends to lead both individual and social decisions toward whatever the other’s expressed risk preference is. Direct tests fail to link the social behavior we observe to the social preference for distributional fairness common in decision-making under certainty.     

Do practice rounds affect experimental auction results?

Researchers use practice rounds to familiarize participants with experimental auction mechanisms. We find a positive correlation between practice bids and bids submitted in later rounds. We consider three explanations for this correlation: a behavioral anchoring effect, a tendency for some auction participants to be more free-spending, and misconception of the experimental auction’s demand revealing qualities.     

家族创始人职业经历与企业风险承担*

基于创始人自身特征的异质性,本文研究家族创始人职业经历与企业风险承担的关系。研究发现,相对于家族创始人具有公共部门职业经历的企业,创始人具有企业部门职业经历的企业风险承担水平更高。进一步地,在产品市场竞争激烈的行业,家族创始人的企业部门职业经历与企业风险承担水平的正相关关系更强。研究表明,具有企业部门职业经历的家族创始人更偏好风险,其所掌控企业的风险承担水平也更高。本文发展了基于代理理论和控制权理论的家族企业风险承担研究,论证了家族创始人职业经历特征对企业风险承担的重要作用。同时,本文研究结论有助于投资者识别企业风险。