We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
SOME PROBLEMS IN USING PROSPECT THEORY TO EXPLAIN STRATEGIC MANAGEMENT ISSUES.
- Authors
BROMILEY, PHILIP; RAU, DEVAKI
- Abstract
Prospect theory has had an immense impact on strategic management scholarship, stemming from an apparent belief that the theory leads to relatively straightforward general hypotheses regarding the relations between performance and risk-taking. We argue that the theory does not justify such general hypotheses. Specifically, we identify two sets of issues related to the application of prospect theory to strategic decisions. The first stems from an incomplete application of the core ideas in the theory--the value and weighting functions, reference points, and frame of reference--to firm decisions. The second set of issues arises fromempirical and practical considerations. These include the availability of risk information in firms in a formthat corresponds to the information used to develop prospect theory, the application of the theory to a level of analysis different from the one it was developed for, and the distinction managers make between risk and uncertainty. Prospect theory only leads to the predictions many claim it makes under restrictive assumptions that those deriving the predictions seldom if ever postulate. Furthermore, these restrictive conditions may not be plausible in the contexts examined. We conclude with some suggestions for when scholars might fruitfully apply prospect theory to explain strategic issues.
- Subjects
PROSPECT theory; STRATEGIC planning; IDEA (Philosophy)
- Publication
Academy of Management Perspectives, 2022, Vol 36, Issue 1, p125
- ISSN
1558-9080
- Publication type
Article
- DOI
10.5465/amp.2018.0072