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The Impacts of Incentive Contracts and Hormones on Risk Taking

Author

Listed:
  • François Desmoulins-Lebeault

    (GEM Recherche - EESC-GEM Grenoble Ecole de Management)

  • Jean-François Gajewski

    (Laboratoire de Recherche Magellan - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - Institut d'Administration des Entreprises (IAE) - Lyon)

  • Luc Meunier

    (ESSCA Research Lab - ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers)

Abstract

Classic corporate finance literature often emphasizes executive incentives, such as stock options, as a way to encourage risk-averse executives to adopt more risk-neutral stances. Behavioral finance studies also note the potential impact of personality variables. In a further step, the current study suggests the relevance of human biology, in the form of hormones, for predicting risk-taking. Experimental results affirm that stock-options contracts drive risk-neutral behavior, mainly due to a shift in focus from losses to gains. Among women, lower testosterone levels and higher cortisol levels encourage greater risk-taking; for men, the findings indicate an inverted U-shaped relationship between testosterone and risk-taking. These impacts are comparable in degree to the effects of contracts, for both their predictive power and economic effect. By establishing the impact of biological variables on risk-taking, this study emphasizes the need for a comprehensive behavioral approach to contract setting.

Suggested Citation

  • François Desmoulins-Lebeault & Jean-François Gajewski & Luc Meunier, 2023. "The Impacts of Incentive Contracts and Hormones on Risk Taking," Post-Print hal-04062811, HAL.
    • Handle: RePEc:hal:journl:hal-04062811
    DOI: 10.3917/fina.pr.008
    as

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