  Reining in Excessive Risk Taking by Executives: The Effect of AccountabilityLefebvre, Mathieu  ; in Theory and Decision (in press) Performance-contingent compensation by means of stock options may induce risk taking in agents that is excessive from the point of view of the company or the shareholders. We test whether increasing ... [more ▼] Performance-contingent compensation by means of stock options may induce risk taking in agents that is excessive from the point of view of the company or the shareholders. We test whether increasing shareholder control may be an effective checking mechanism to rein in such excessive risk taking. We thus tell one group of experimental CEOs that they may have to justify their decision making processes in front of their shareholders. This indeed reduces risk taking and increases the performance of the companies they manage. Implications are discussed. [less ▲] Detailed reference viewed: 13 (2 ULg)Risk Taking of Executives under Different Incentive Contracts: Experimental EvidenceLefebvre, Mathieu ; E-print/Working paper (2011) Classic financial agency theory recommends compensation through stock options rather than shares to induce risk neutrality in otherwise risk averse agents. In an experiment, we find that subjects acting ... [more ▼] Classic financial agency theory recommends compensation through stock options rather than shares to induce risk neutrality in otherwise risk averse agents. In an experiment, we find that subjects acting as executives do also take risks that are excessive from the perspective of shareholders if compensated through options. Compensation through restricted company stock reduces the uptake of excessive risks. Even under stock-ownership, however, experimental executives continue to take excessive risks—a result that cannot be accounted for by classic incentive theory. We develop a basic model in which such risk-taking behavior is explained based on a richer array of risk attitudes derived from Prospect Theory. We use the model to derive hypotheses on what may be driving excessive risk taking in the experiment. Testing those hypotheses, we find that most of them are indeed borne out by the data. We thus conclude that a prospect-theory-based model is more apt at explaining risk attitudes under different compensation regimes than traditional principal-agent models grounded in expected utility theory. [less ▲] Detailed reference viewed: 12 (1 ULg)Incentive Effects on Risk Attitude in Small Probability ProspectsLefebvre, Mathieu ; ; in Economics Letters (2010), 109(2), We report between-subject results on the effect of monetary stakes on risk attitudes. While we find the typical risk seeking for small probabilities, risk seeking is reduced under high stakes. This ... [more ▼] We report between-subject results on the effect of monetary stakes on risk attitudes. While we find the typical risk seeking for small probabilities, risk seeking is reduced under high stakes. This suggests that utility is not consistently concave. [less ▲] Detailed reference viewed: 14 (7 ULg)Incentive Effects on Risk Attitude in Small Probability ProspectsLefebvre, Mathieu ; ; E-print/Working paper (2009) Most studies on the role of incentives on risk attitude report data obtained from within-subject experimental investigations. This may however raise an issue of sequentiality of effects as later choices ... [more ▼] Most studies on the role of incentives on risk attitude report data obtained from within-subject experimental investigations. This may however raise an issue of sequentiality of effects as later choices may be influenced by earlier ones. This paper reports instead between-subject results on the effect of monetary stakes on risk attitudes for small probability prospects in a laboratory experiment. Under low stakes, we find the typical risk seeking behavior for small probabilities predicted by the prospect theory. But under high stakes, we provide some evidence that risk seeking behavior is dramatically reduced. This could suggest that utility is not consistently concave over the outcome space, but rather contains a convex section for very small amounts. [less ▲] Detailed reference viewed: 21 (3 ULg)The Ratio Bias Phenomenon : Fact or Artifact ?Lefebvre, Mathieu ; ; E-print/Working paper (2009) The ratio bias – according to which individuals prefer to bet on probabilities expressed as a ratio of large numbers to normatively equivalent or superior probabilities expressed as a ratio of small ... [more ▼] The ratio bias – according to which individuals prefer to bet on probabilities expressed as a ratio of large numbers to normatively equivalent or superior probabilities expressed as a ratio of small numbers – has recently gained momentum, with researchers especially in health economics emphasizing the policy importance of the phenomenon. Although the bias has been replicated several times, some doubts remain about its economic significance. Our two experiments show that the bias disappears once order effects are excluded, and once salient and dominant incentives are provided. This holds true for both choice and valuation tasks. Also, adding context to the decision problem does not change this outcome. No ratio bias could be found in between-subject tests either, which leads us to the conclusion that the policy relevance of the phenomenon is doubtful at best. [less ▲] Detailed reference viewed: 12 (2 ULg) |
||
