Psychological factors and stock option exercise

We investigate stock option exercise decisions by over 50,000 employees at seven corporations. Controlling for economic factors, psychological factors influence exercise. Consistent with psychological models of beliefs, emplo yees exercise in response to stock price trends-exercise is positively rela ted to stock returns during the preceding month and negatively related to r eturns over longer horizons. Consistent with psychological models of values that include reference points, employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year.