Abstract
The behavioral framework has proven successful in explaining several puzzling aspects of executive-stock-based compensation contracts. Recent literature suggests that both the cumulative prospect theory and the rank-dependent expected utility theory lead to better predictions of employee stock option (ESO) exercise decisions. The aim of this chapter is to provide an overview of those behavioral ESO models and discuss their implications in (1) the valuation of ESOs, (2) the design of optimal ESO contracts, and (3) the assessment of employee sentiment.
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