Better to Have Led and Lost than Never to Have Led at All? Competitive Dethronement, the Endowment Effect, and Risk Taking

In this paper, we develop a theoretical model and offer a first empirical test of how competitive dethronement affects managerial risk taking. Drawing on the mechanism of endowment effect and reference-dependent utility theory, we predict that former market leaders take more risks compared to, otherwise identical, competitors. We empirically test this prediction using two contexts allowing us to use different methods to operationalize risk. The first setting draws on field data from a two-month banking sales contest. The second, quasi-laboratory, data comes from an educational game. Consistent with model’s prediction, we find that dethronement is associated with increased risk taking but that the endowment effect leading to such response decays over time. In contrast, a mere decline in performance ranking does not have the same effect.