Risk Preferences and Misconduct: Evidence from Politicians

by Dylan Minor

Executive Summary — Risk-taking is widely understood to be a vital aspect of leadership, yet it may have a dark side. This study of financial risk-taking among politicians shows risk preferences to be an important antecedent of misconduct. Risk preferences as measured by portfolio choices between risky and safe investments were found to strongly predict political scandals. When employing risk-taking leaders, this suggests a potential tradeoff between performance and misconduct.

Author Abstract

When seeking new leaders, business and government organizations alike often need individuals that are less risk averse, or even risk-seeking, in order to improve performance. However, individuals amenable to increased risk-taking may be more likely to engage in misconduct. To study this issue, we explore U.S. political scandals and the implicated politicians’ portfolio choices. We find that a politician allocating all of her portfolio to risky investments has double the odds of being involved in a political sandal compared to a politician allocating all of her portfolio to safe investments. This suggests that those who are more willing to take risks in their personal finances are also more likely to engage in misconduct. We validate portfolio choice as a measure of risk preferences by correlating actual high-stakes investment choices (average $700,000 U.S.) to conventional laboratory lottery choices (average $51 U.S.) of wealthy investors.

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