Do Markets Encourage Risk Seeking Behavior?

Excessive risk-taking in markets can have devastating consequences as the latest financial crises have highlighted. In this paper we ask whether markets as an institution encourage such excessive risk-taking. To establish causality, we isolate the effects of market interaction in a laboratory experiment keeping other possibly confounding factors constant. We find that the opposite is true. Markets decrease participants’ willingness to take risks. This finding can be explained by social comparison utility in the presence of negatively correlated risks.