The higher you fly, the harder you try not to fall: An analysis of the risk taking behavior in social trading

Abstract In this article, we study the risk taking behavior under convex incentives in an innovative online trading setting. In particular, we empirically analyze how an infinite investment horizon and valuable outside options affect risk taking behavior. We find that traders choose the absolute and relative risk of the trading strategy depending on the proximity to the high-water mark (HWM), which represents a series of remuneration options on the assets under management. As a consequence, we observe more risk mitigating behavior the closer the HWM comes. Next, we show that the traders behave strategically and make their risk decisions based on their overall portfolio payoff. Finally, we find that social status indicators such as rankings and communication abilities significantly affect the risk taking behavior.