Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2020:24: Delegation Decisions in Finance

Felix Holzmeister (), Martin Holmén (), Michael Kirchler (), Matthias Stefan () and Erik Wengström ()
Additional contact information
Felix Holzmeister: University of Innsbruck, Department of Banking and Finance
Martin Holmén: University of Gothenburg, Department of Economics, Centre for Finance
Michael Kirchler: University of Innsbruck, Department of Banking and Finance
Matthias Stefan: University of Innsbruck, Department of Banking and Finance
Erik Wengström: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: We run an online experiment with finance professionals and subjects from the general population (clients) to examine drivers and implications of clients' delegation decisions. We find that clients favor delegation to investment algorithms, followed by delegation to finance professionals with aligned incentives and lastly to those with fixed incentives. We also show that trust in investment algorithms or money managers (finance professionals), respectively, and clients' propensity to shift blame on others increases the likelihood of delegation, whereas own decision-making quality is associated with a decrease. In measuring the implications of clients' delegation decisions, we report high variability among finance professionals' perceptions of clients' preferred risk levels. We show that this results in overlaps in portfolio risk across risk-levels of clients, indicating problems of risk communication between clients and their money managers.

Keywords: Experimental finance; finance professionals; delegation decisions.

JEL-codes: C93; G11; G41

46 pages, November 20, 2020

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