Corporate governance

Why do some managers take more risks than others?

Imagine a CEO deciding whether to invest in a risky new project that could either double the company's profits or lead to significant losses.

The CEO's decision-making is influenced by moral hazard, where they might take greater risks because they don't bear the full consequences of failure, relying instead on the company's resources and reputation.

Example

If the CEO invests $1 million, and the project succeeds, it doubles to $2 million for the company. If it fails, the company loses $1 million.

Remember this

Moral hazard can lead to riskier decisions by corporate managers.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

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Educational content, not financial advice.

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