Risk-taking under limited liability: Quantifying the role of motivated beliefs

Arbeitspapier

This paper investigates whether limited liability affects risk-taking through motivated beliefs. To do so, we run a within-subject experiment in which subjects invest in a risky asset under full or limited liability. In both cases, before the investment is made, subjects observe a noisy signal that indicates whether the investment will succeed or fail. They then state the likelihood of the investment's success and decide how much to invest. Our results show a strong effect of limited liability on both the investment decision and the formation of motivated beliefs. Compared to subjects under full liability, subjects under limited liability not only invest larger amounts but are also significantly more optimistic about the success of their investments. Finally, we show that more than one-third of the increase in investment under limited liability can be explained through motivated beliefs.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper ; No. 210

Classification and Topics

• Classification: Wirtschaft ; Design of Experiments: Laboratory, Individual ; Expectations; Speculations ; Portfolio Choice; Investment Decisions ; Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets‡
• Subject: Limited Liability ; Motivated Beliefs ; Experiment

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bosch-Rosa, Ciril ; Gietl, Daniel ; Heinemann, Frank
• Event: Veröffentlichung
• (who): Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition
• (where): München und Berlin
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/222107
• Last update: 10.03.2025, 11:45 AM CET