We started exploring this topic by collecting data on fund performance and office location from over 3,000 hedge funds, which collectively oversee more than $500 billion in assets.
We then examined the correlation between hedge fund volatility and office location in terms of number of stories above ground. We found that as the elevation of hedge fund managers' offices increased, they were more willing to take risks that resulted in more volatility. This was true even when statistically controlling for factors such as total assets, fund strategy and several other variables that could have led more resourceful hedge funds to occupy expensive offices that are often found on higher levels of buildings.
Next, we conducted four field studies across 22 U.S. states to explore the causal link between elevation and risk and to explain how and when this phenomenon occurs.
One of these studies involved conducting, quite literally, an "elevator pitch" – or making a proposal in the time it takes to get from one floor to the next. Essentially an experimenter would randomly meet with people in an elevator at the Renaissance Center, a 73-floor skyscraper in Detroit, Michigan. While traveling up or down, the experimenter would pose a potential investment decision (a 30-second elevator pitch, if you would) which involved deciding how to allocate a certain amount of money between a low-risk savings account and a high-risk investment.
We found that people going up were much more likely to invest in the risky (rather than safe) option compared with those going down. This was true even when we asked the same person about two hard-to-compare investments, once while going up and the other on the way down. We used various other controls to ensure there was no "order" effect.
In another study, we randomly placed participants on the ground floor or third floor of a building and asked them to make 10 decisions with differing degrees of risk and payoff. We found that people implicitly feel more powerful in higher elevations, consequently leading to increased risk-seeking behavior – often in an irrational manner. This is in line with previous psychological findings suggesting that individuals who feel powerful are more likely to seek risks.