Optimism bias and incentive contracts in portfolio delegation

Jian Wang, Jiliang Sheng and Jun Yang

Economic Modelling, 2013, vol. 33, issue C, 493-499

Abstract: This paper incorporates the well-documented managerial optimism bias into a standard portfolio delegation problem to study its impact on investment strategies and the optimal incentive contract offered by the investor to the manager. It is shown that the optimistic manager trades a larger quantity of the risky asset and thus takes more risk than the rational manager. Managerial optimism bias can offset her risk aversion and increase the investor's wealth by reducing moral hazard between the investor and the manager. Furthermore, a pronounced optimism bias reduces the incentive component of the incentive contract, suggesting that an optimistic manager requires fewer incentives to align her decisions with the interests of the investor.

Keywords: Optimism bias; Incentive contract; Portfolio delegation; Investment strategy (search for similar items in EconPapers)
JEL-codes: D82 D86 J33 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:33:y:2013:i:c:p:493-499

DOI: 10.1016/j.econmod.2013.04.042

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