When Does Increased Risk-Taking Pay Off?

20/06/2013

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The last quarter of the game has begun, and the fans are cheering on their respective teams, as they always do during National Basketball Association (NBA)  games. The players of the team that is down try their best to turn around the game. In this situation, does it make sense for the team to increase risk and make more three-point shot attempts?  A successful shot from outside the three-point line is worth three points instead of two, but due to the higher difficulty there is a greater risk of unsuccessful attempts. And after a failed shot, the opponent has the chance to win the ball and start a counter-attack. In collaboration with Jan Höcker und Stefan Zimmermann, Professor Christian Grund has now investigated whether engaging in risk-taking strategies in NBA games pays off. In an empirical study, they have analyzed the relevance and effectiveness of increased risk-taking in NBA games. The research article, titled “Incidence and consequences of Risk-Taking Behavior in Tournaments – Evidence from the NBA,” has now been published in the academic journal “Economic Inquiry.”

 

Taking High Risks Rarely Pays Off

In high-performance sports, statistics play a major role: The NBA collects and documents all moves and movements made in the matches and makes the data available on the internet. This gave the researchers the chance to obtain information on when the teams resort to increasing their attempts at three-point shots and whether this strategy is successful.

Their analysis shows that teams that are down indeed take more three-point shots, but also that this increased risk-taking is mostly unsuccessful. According to Prof. Grund, such decisions are irrational and, al least most of the time, wrong. The researchers’ analysis shows that teams that do not change their strategy have more chances to turn around the game than the teams taking the higher-risk strategy.

Transferable Research Results

For Grund, sport provides just one example of what can be called a tournament situation. Such situations also occur in companies, for example, but as there is almost no data available for corporate situations, the researchers turned to sports.

In tournament-type situations, relative performances are evaluated; in a company, this occurs when an employee’s performance is assessed in relation to his or her colleagues’ performances. For instance, a company might announce that one team member will receive a raise or a bonus at the end of the year. According to Grund, “this is analogous to a sporting situation. Even if the situations are not fully comparable, bosses who create such a tournament situation should be aware that they provoke changes in behavior.” And these are not always in the best interest of the company: Competitors for the raise or bonus might focus on the competition and neglect other high-level responsibilities. Or, if they perceive a possible underperformance on their part, e.g. in their investment decisions, they might engage in increased risk-taking behaviors.

Employers who want to motivate their employees through incentives should know about the risks. As Christian Grund puts it, “Such incentive systems can be beneficial, but they should be tailored to the individual situation.”