Conspicuous conservatism in risk choice |
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| Authors: | Boaz Moselle François Degeorge Richard Zeckhauser |
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| Affiliation: | (1) The Brattle Group, Brussels, Belgium;(2) Swiss Finance Institute, University of Lugano, Lugano, Switzerland;(3) Kennedy School of Government, Harvard University, 79 Kennedy St, Cambridge, MA 02138, USA |
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| Abstract: | ![]()
We analyze the risk levels chosen by agents who have private information regarding their quality, and whose performance will be judged and rewarded by outsiders. Assume that risk choice is observable. Agents will choose risk strategically to enhance their expected reputations. We show that conspicuous conservatism results: agents of different qualities choose levels below those that would be chosen if quality were observable. This happens because bad agents must cloak their identity by choosing the same risk level as good agents, and good agents are more likely to distinguish themselves if they reduce the risk level. Our results contrast starkly with those for the case when risk choice cannot be observed. |
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| Keywords: | Risk choice Signaling Conservatism |
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