Working Paper: CEPR ID: DP12984
Authors: Martin Weber; Maximilian Germann; Benjamin Loos
Abstract: A recent theory by Gennaioli, Shleifer, and Vishny (2015) proposes that trust is an important component for delegated investing. This paper tests the theory in a laboratory experiment. Participants first play a trust game. Participants then act as investors who have to make two separate, delegated investment decisions. Using the amount returned in the trust game as measure of trustworthiness, we show that investors are willing to take substantially more risk when a money manager is more trustworthy, even if this manager charges higher costs. The willingness to take more risk and pay higher costs is increasing in the difference in trustworthiness of the two money managers. This findingis robust to different specifications of the difference in trustworthiness.
Keywords: trust; money doctor; investment decision; risk aversion
JEL Codes: G11; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trust (G21) | risk-taking behavior (D91) |
| trustworthiness of money manager (G11) | investment decisions (G11) |
| trustworthiness of money manager (G11) | willingness to bear higher costs (D23) |
| difference in trustworthiness (Z13) | investment decisions (G11) |