The Impact of Poor Performance on Risk-Taking Attitudes: A Longitudinal Study with a PLS Causal Modeling Approach

ABSTRACT This article addresses some important issues in risk‐return, or mean‐variance, research. Much of the research in this tradition has used Kahneman and Tversky's prospect theory to explain Bowman's proposition that “troubled firms” prefer and seek risk. Unfortunately, two key constr...

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Bibliographic Details
Published in:Decision sciences 1997-01, Vol.28 (1), p.59-80
Main Author: Lee, Don Y.
Format: Article
Language:English
Subjects:
and Strategic Management and Policy
Attitudes
Breweries
Decision making
Expected utility
Expected values
Hypotheses
Longitudinal studies
Organization theory
Organizational Behavior
Organizational Theory
Probability distribution
Rates of return
Return on assets
Return on equity
Risk aversion
Risk exposure
Strategic management
Studies
Utility functions
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Summary:ABSTRACT This article addresses some important issues in risk‐return, or mean‐variance, research. Much of the research in this tradition has used Kahneman and Tversky's prospect theory to explain Bowman's proposition that “troubled firms” prefer and seek risk. Unfortunately, two key constructs in prospect theory, reference point and risk attitude, have not been applied in risk‐return research in ways consistent with prospect theory. The author examines a series of inconsistencies in the use of prospect theory in risk‐return research to date and suggests remedies. A proposed approach using a longitudinal research design at the individual‐firm level is applied in an empirical test of the Bowman hypothesis with data from brewing firms in the United States. The findings strongly support the Bowman hypothesis.
ISSN:0011-7315
1540-5915
DOI:10.1111/j.1540-5915.1997.tb01302.x