DP12984 Trust and Delegated Investing: A Money Doctors Experiment

Author(s): Maximilian Germann, Benjamin Loos, Martin Weber
Publication Date: June 2018
Keyword(s): Investment Decision, Money Doctor, risk aversion, Trust
JEL(s): G11, G23
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12984

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 finding is robust to different specifications of the difference in trustworthiness.