The Impacts of Incentive Contracts and Hormones on Risk Taking

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.