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Looking at prospect theory
Author(s) -
Bromiley Philip
Publication year - 2010
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.885
Subject(s) - prospect theory , economics , range (aeronautics) , function (biology) , mathematical economics , value (mathematics) , econometrics , parametric statistics , microeconomics , positive economics , neoclassical economics , mathematics , statistics , engineering , evolutionary biology , biology , aerospace engineering
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. Copyright © 2010 John Wiley & Sons, Ltd.