2015/01 No guts, no glory: An experiment on excessive risk-taking by Kristoffer W. Eriksen and Ola Kvaløy

We study risk-taking behavior in tournaments where the optimal strategy is to take no risk. By keeping the optimal strategy constant, while varying the competitiveness in the tournaments, we are able to investigate the relationship between competitiveness and excessive risk-taking. In the most competitive tournament, less than 10% of the subjects played the optimal strategy in the first rounds. The majority playing dominated strategies increased their risk-taking during game of play. When we removed feedback about winner’s decisions each round, and when we reduced the number of contestants in the tournaments, subjects significantly reduced their risk-taking. We also find strong peer group effects. In particular, the winner’s decision in round t-1 had a strong and significant effect on the competitor’s risk-taking in round t.