Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/208062 
Year of Publication: 
2019
Series/Report no.: 
Discussion Paper No. 162
Publisher: 
Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition, München und Berlin
Abstract: 
One of the reasons for the recent crisis is that financial institutions took "too much risk" (Brunnermeier, 2009; Taylor et al., 2010). Why were these institutions taking so much risk is an open question. A recent strand in the literature points towards the "cognitive dissonance" of investors who, because of the limited liability of their investments, had a distorted view of riskiness (e.g., Barberis (2013); Benabou (2015)). In a series of laboratory experiments we show how limited liability does not affect the beliefs of investors, but does increase their willing exposure to risk. This results points to a simple explanation for the over-investment of banks and hedge-funds: When incentives are not aligned, investors take advantage of the moral hazard opportunities.
Subjects: 
Moral Hazard
Cognitive Dissonance
Behavioral Finance
JEL: 
C91
D84
G11
G41
Document Type: 
Working Paper

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