Stakes and Mistakes

We provide causal evidence on one of the most prominent critiques of behavioral finance – that most of the evidence in psychology, which underpins the field, comes from experiments with little at stake for participants. How far do behavioral biases – leading to investment mistakes – get attenuated when stakes are raised? We study this issue by exploiting exogenous variation in stakes resulting from unexpected inheritances due to sudden parental death. We find that increasing stakes reduces investment mistakes, but this effect is economically small. Mistakes do not disappear when stakes are raised, even when this increase is substantial.