An investigation of risk behavior in financial decision-making

1993 1993

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Abstract (summary)

This study examines individual decision making in financial contexts. Specifically, the study investigates basic propositions of Prospect Theory (Kahneman and Tversky, 1979) in a variety of decision making contexts that are often faced by corporate managers. In addition, the research explores the effects of ruinous losses, multiple reference points, and prior gains and losses on financial decision making. It was hypothesized that (1) decision makers' risk behavior will be risk avoiding in gain situations and risk seeking in loss situations, (2) prior gains and losses will differentially impact risk taking/avoiding behavior, (3) decision makers will switch from risk seeking to risk avoiding in the presence of ruinous losses (i.e. bankruptcy), and (4) managers' risky behavior will be affected by both target and current levels of performance.

Seven experiments were conducted which required experienced corporate managers to choose between alternative investment proposals that varied in their degree of risk. From these choices, risk taking or avoiding behavior was inferred. Results indicated that financial managers exhibit risk taking as well as risk avoiding behavior. Across a variety of investment settings, experienced managers display an underlying tendency towards risk avoidance. However, decision contexts that clearly involve financial losses or offer returns well below potential reference points result in risk taking behavior. In addition, risk behavior was influenced by various contextual factors. The presence of prior outcomes affected risky choices, with greater risk avoidance occurring when prior losses were recently experienced. Managers also switched from risk taking when faced with loss alternatives, to risk avoiding when those losses potentially became ruinous. Finally, corporate managers' risk behavior was influenced by the joint consideration of both current and target levels of performance.

Indexing (details)

Business community;
0508: Finance
0310: Business community
0621: Psychology
Identifier / keyword
Social sciences; Psychology; corporate managers
An investigation of risk behavior in financial decision-making
Sullivan, Kathryn T.
Number of pages
Publication year
Degree date
School code
DAI-A 54/02, Dissertation Abstracts International
Place of publication
Ann Arbor
Country of publication
United States
Lacey, Nelson J.
University of Massachusetts Amherst
University location
United States -- Massachusetts
Source type
Dissertations & Theses
Document type
Dissertation/thesis number
ProQuest document ID
Database copyright ProQuest LLC; ProQuest does not claim copyright in the individual underlying works.
Document URL
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