Prospect theory and risk-seeking behavior by troubled firms

Doron Kliger, Iris Tsur

Research output: Contribution to journalArticlepeer-review


We employ Prospect Theory (PT, Kahneman and Tversky [1979]) to explain the relationship between risk and return at the organization level. Our modeling approach addresses shortcomings in previous research approaches. We suggest an alternative approach for inferring the reference point, a key element of PT, and measuring risk, as well as a different representation of the risk-return association taking into consideration a timeline of the firm's state, its state dependent action, and consequences. Consistent with PT, results using COMPUSTAT data show that firms with returns above their reference levels take less risk than firms with returns below their reference levels.

Original languageEnglish
Pages (from-to)29-40
Number of pages12
JournalJournal of Behavioral Finance
Issue number1
StatePublished - 2011


  • Organization level
  • Prospect theory
  • Reference point
  • Risk preferences
  • Strategic decision making

ASJC Scopus subject areas

  • Experimental and Cognitive Psychology
  • Finance


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