Looking at prospect theory

This paper demonstrates that prospect theory's (PT) predictions differ dramatically from what strategy scholars have inferred. PT's value function predicts negative risk-return associations for high performers and positive for low performers, directly contrary to the strategy literature. I...

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Bibliographic Details
Published in:Strategic management journal 2010-12, Vol.31 (12), p.1357-1370
Main Author: Bromiley, Philip
Format: Article
Language:English
Subjects:
behavioral theory
Business management
Business risks
Business strategies
Corporate strategies
Decision theory
Management research
Management science
Management techniques
Mathematical independent variables
Organization theory
Predictions
Prospect theory
RESEARCH NOTES AND COMMENTARIES
Risk aversion
Risk aversion preference
Risk preferences
Risk premiums
risk taking
Strategic management
Studies
Weighting functions
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Summary:This paper demonstrates that prospect theory's (PT) predictions differ dramatically from what strategy scholars have inferred. PT's value function predicts negative risk-return associations for high performers and positive for low performers, directly contrary to the strategy literature. In addition, PT's isolation assumption means most firm choices should appear as mixed gambles. Prior PT-based theorizing in strategy implicitly assumed that the firm faced unmixed gambles. Finally, it demonstrates that PT does not make the general predictions most strategy researchers have assumed, but rather PT's predictions depend on a full range of parametric and choice characteristics that strategy scholars have ignored.
ISSN:0143-2095
1097-0266
DOI:10.1002/smj.885