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Modifying variability and correlation in winner-take-all contests (RV of 2001/43/TM)

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The authors consider contests with a fixed proportion of winners based on relative performance. Special attention is paid to winner-take-all contests, which they define as contests with relatively few winners receiving relatively large awards, but they consider the full range of values of the proportion of winners. If a contestant has the opportunity to modify the distribution of her performance, what strategy is advantageous? The authors consider modifications in the variability of the distribution and in correlations with the performance of other contestants. When the proportion of winners is less than one-half, however, increasing variability and decreasing correlations lead to improved chances of winning. When this proportion is greater than one-half, it is better to decrease variability and increase correlations. Thus, it is better to take chances and to attempt to distance oneself from the other contestants (i.e., to break away from the herd) when there are few winners; a more conservative, herding strategy makes sense when there are many winners. The authorsÂ’ analytical and numerical results indicate that the probability of winning can change substantially as variability and/or correlations are modified. They briefly consider some practical issues related to the recommended strategies and some possible extensions.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2002/2002-50.pdf

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Copyright INSEAD. All rights reserved