IDEAS home Printed from https://ideas.repec.org/a/eee/beexfi/v40y2023ics2214635023000552.html
   My bibliography  Save this article

What is risk to managers?

Author

Listed:
  • Christoffersen, Jeppe
  • Holzmeister, Felix
  • Plenborg, Thomas

Abstract

In an online experiment with a sample of 4287 managers from small- and medium-sized enterprises in Denmark, we present participants with scenario-dependent outcomes of a hypothetical investment prospect and elicit their perception of risk and their perception of the investment’s attractiveness (as a proxy for investment preferences). The experimental data is merged with a set of background variables on the company from the Danish registry which allows controlling for firm-specific effects. We find that risk perception is driven by the likelihood and the return associated with the worst-case scenario as well as the size of the required investment. Furthermore, we provide evidence that managers’ perception of the project’s attractiveness is significantly associated with their individual-level risk preferences and the interaction effect between risk preferences and risk perception. This implies that not only the characteristics of the different scenarios but also individuals’ risk preferences play an important role when assessing the attractiveness of a business opportunity.

Suggested Citation

  • Christoffersen, Jeppe & Holzmeister, Felix & Plenborg, Thomas, 2023. "What is risk to managers?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:beexfi:v:40:y:2023:i:c:s2214635023000552
    DOI: 10.1016/j.jbef.2023.100841
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S2214635023000552
    Download Restriction: no
    File URL: https://libkey.io/10.1016/j.jbef.2023.100841?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Unser, Matthias, 2000. "Lower partial moments as measures of perceived risk: An experimental study," Journal of Economic Psychology, Elsevier, vol. 21(3), pages 253-280, June.
    2. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2011. "Individual Risk Attitudes: Measurement, Determinants, And Behavioral Consequences," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 522-550, June.
    3. Paul Slovic & Baruch Fischhoff & Sarah Lichtenstein, 1982. "Why Study Risk Perception?," Risk Analysis, John Wiley & Sons, vol. 2(2), pages 83-93, June.
    4. Felix Holzmeister & Christoph Huber & Stefan Palan, 2022. "A critical perspective on the conceptualization of risk in behavioral and experimental finance," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 30, pages 408-413, Edward Elgar Publishing.
    5. Nigel Nicholson & Emma Soane & Mark Fenton-O'Creevy & Paul Willman, 2005. "Personality and domain-specific risk taking," Journal of Risk Research, Taylor & Francis Journals, vol. 8(2), pages 157-176, March.
    6. Alen Nosić & Martin Weber, 2010. "How Riskily Do I Invest? The Role of Risk Attitudes, Risk Perceptions, and Overconfidence," Decision Analysis, INFORMS, vol. 7(3), pages 282-301, September.
    7. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    8. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    9. Felix Holzmeister & Jürgen Huber & Michael Kirchler & Florian Lindner & Utz Weitzel & Stefan Zeisberger, 2020. "What Drives Risk Perception? A Global Survey with Financial Professionals and Laypeople," Management Science, INFORMS, vol. 66(9), pages 3977-4002, September.
    10. Robert E. Hoskisson & Michael A. Hitt & Charles W. L. Hill, 1993. "Managerial Incentives and Investment in R&D in Large Multiproduct Firms," Organization Science, INFORMS, vol. 4(2), pages 325-341, May.
    11. Kenneth R. MacCrimmon & Donald A. Wehrung, 1990. "Characteristics of Risk Taking Executives," Management Science, INFORMS, vol. 36(4), pages 422-435, April.
    12. Pierluigi Martino & Alessandra Rigolini & Giuseppe D’Onza, 2020. "The relationships between CEO characteristics and strategic risk-taking in family firms," Journal of Risk Research, Taylor & Francis Journals, vol. 23(1), pages 95-116, January.
    13. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    14. Carlsson, Fredrik & Raun Mørkbak, Morten & Bøye Olsen, Søren, 2010. "The first time is the hardest: A test of ordering effects in choice experiments," Working Papers in Economics 470, University of Gothenburg, Department of Economics.
    15. Stefan Zeisberger, 2022. "Do people care about loss probabilities?," Journal of Risk and Uncertainty, Springer, vol. 65(2), pages 185-213, October.
    16. Ramoglou, Stratos, 2021. "Knowable opportunities in an unknowable future? On the epistemological paradoxes of entrepreneurship theory," Journal of Business Venturing, Elsevier, vol. 36(2).
    17. Matthias Pelster & Annette Hofmann & Nina Klocke & Sonja Warkulat, 2023. "Dark Triad Personality Traits and Selective Hedging," Journal of Business Ethics, Springer, vol. 182(1), pages 261-286, January.
    18. Mullins, John W. & Forlani, David, 2005. "Missing the boat or sinking the boat: a study of new venture decision making," Journal of Business Venturing, Elsevier, vol. 20(1), pages 47-69, January.
    19. Paul Slovic, 1999. "Are trivial risks the greatest risks of all?," Journal of Risk Research, Taylor & Francis Journals, vol. 2(4), pages 281-288, October.
    20. Weber, Elke U. & Anderson, Carolyn J. & Birnbaum, Michael H., 1992. "A theory of perceived risk and attractiveness," Organizational Behavior and Human Decision Processes, Elsevier, vol. 52(3), pages 492-523, August.
    21. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    22. Jianmin Jia & James S. Dyer & John C. Butler, 1999. "Measures of Perceived Risk," Management Science, INFORMS, vol. 45(4), pages 519-532, April.
    23. Lennart Sjoberg, 1999. "Consequences of perceived risk: Demand for mitigation," Journal of Risk Research, Taylor & Francis Journals, vol. 2(2), pages 129-149.
    24. Carmen Keller & Michael Siegrist & Heinz Gutscher, 2006. "The Role of the Affect and Availability Heuristics in Risk Communication," Risk Analysis, John Wiley & Sons, vol. 26(3), pages 631-639, June.
    25. Schoemaker, Paul J H, 1993. "Determinants of Risk-Taking: Behavioral and Economic Views," Journal of Risk and Uncertainty, Springer, vol. 6(1), pages 49-73, January.
    26. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-1289, November.
    27. Elke U. Weber & Richard A. Milliman, 1997. "Perceived Risk Attitudes: Relating Risk Perception to Risky Choice," Management Science, INFORMS, vol. 43(2), pages 123-144, February.
    28. Richard J. Arend, 2020. "Strategic decision-making under ambiguity: a new problem space and a proposed optimization approach," Business Research, Springer;German Academic Association for Business Research, vol. 13(3), pages 1231-1251, November.
    29. Paul Slovic & Melissa L. Finucane & Ellen Peters & Donald G. MacGregor, 2004. "Risk as Analysis and Risk as Feelings: Some Thoughts about Affect, Reason, Risk, and Rationality," Risk Analysis, John Wiley & Sons, vol. 24(2), pages 311-322, April.
    30. Baruch Fischhoff, 1995. "Risk Perception and Communication Unplugged: Twenty Years of Process," Risk Analysis, John Wiley & Sons, vol. 15(2), pages 137-145, April.
    31. Rui Mata & Renato Frey & David Richter & Jürgen Schupp & Ralph Hertwig, 2018. "Risk Preference: A View from Psychology," Journal of Economic Perspectives, American Economic Association, vol. 32(2), pages 155-172, Spring.
    32. Friedman, Daniel & Isaac, R. Mark & James, Duncan & Sunder, Shyam, 2014. "Risky Curves: On the Empirical Failure of Expected Utility," Santa Cruz Department of Economics, Working Paper Series qt87v8k86z, Department of Economics, UC Santa Cruz.
    33. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
    34. James G. March & Zur Shapira, 1987. "Managerial Perspectives on Risk and Risk Taking," Management Science, INFORMS, vol. 33(11), pages 1404-1418, November.
    35. Ali Siddiq Alhakami & Paul Slovic, 1994. "A Psychological Study of the Inverse Relationship Between Perceived Risk and Perceived Benefit," Risk Analysis, John Wiley & Sons, vol. 14(6), pages 1085-1096, December.
    36. Divya Aggarwal & Pitabas Mohanty, 2022. "Influence of imprecise information on risk and ambiguity preferences: Experimental evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(4), pages 1025-1038, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zvonimir Bašić & Parampreet C. Bindra & Daniela Glätzle-Rützler & Angelo Romano & Matthias Sutter & Claudia Zoller, 2021. "The Roots of Cooperation," ECONtribute Discussion Papers Series 097, University of Bonn and University of Cologne, Germany.
    2. Angerer, Silvia & Bolvashenkova, Jana & Glätzle-Rützler, Daniela & Lergetporer, Philipp & Sutter, Matthias, 2023. "Children’s patience and school-track choices several years later: Linking experimental and field data," Journal of Public Economics, Elsevier, vol. 220(C).
    3. Daniel Gründler & Eric Mayer & Johann Scharler, 2023. "Monetary Policy Announcements, Information Shocks, and Exchange Rate Dynamics," Open Economies Review, Springer, vol. 34(2), pages 341-369, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Felix Holzmeister & Matthias Stefan, 2021. "The risk elicitation puzzle revisited: Across-methods (in)consistency?," Experimental Economics, Springer;Economic Science Association, vol. 24(2), pages 593-616, June.
    2. Felix Holzmeister & Christoph Huber & Stefan Palan, 2022. "A critical perspective on the conceptualization of risk in behavioral and experimental finance," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 30, pages 408-413, Edward Elgar Publishing.
    3. repec:grz:wpsses:2021-06 is not listed on IDEAS
    4. Hans-Martin Gaudecker & Arthur Soest & Erik Wengström, 2012. "Experts in experiments," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 159-190, October.
    5. Chris Brooks & Louis Williams, 2024. "People are people: A comparative analysis of risk attitudes across Europe," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3545-3566, July.
    6. Ranganathan, Kavitha & Lejarraga, Tomás, 2021. "Elicitation of risk preferences through satisficing," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    7. Bocqueho, Geraldine & Jacquet, Florence & Reynaud, Arnaud, 2011. "Expected Utility or Prospect Theory Maximizers? Results from a Structural Model based on Field-experiment Data," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114257, European Association of Agricultural Economists.
    8. Veld, Chris & Veld-Merkoulova, Yulia V., 2008. "The risk perceptions of individual investors," Journal of Economic Psychology, Elsevier, vol. 29(2), pages 226-252, April.
    9. Andersen, Steffen & Harrison, Glenn W. & Lau, Morten Igel & Rutström, Elisabet E., 2010. "Behavioral econometrics for psychologists," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 553-576, August.
    10. Naranjo, Maria A. & Alpízar, Francisco & Martinsson, Peter, 2019. "Alternatives for Risk Elicitation in the Field: Evidence from Coffee Farmers in Costa Rica," EfD Discussion Paper 19-21, Environment for Development, University of Gothenburg.
    11. Ryan O. Murphy & Robert H. W. ten Brincke, 2018. "Hierarchical Maximum Likelihood Parameter Estimation for Cumulative Prospect Theory: Improving the Reliability of Individual Risk Parameter Estimates," Management Science, INFORMS, vol. 64(1), pages 308-328, January.
    12. Felix Holzmeister & Jürgen Huber & Michael Kirchler & Florian Lindner & Utz Weitzel & Stefan Zeisberger, 2020. "What Drives Risk Perception? A Global Survey with Financial Professionals and Laypeople," Management Science, INFORMS, vol. 66(9), pages 3977-4002, September.
    13. Holzmeister, Felix & Stefan, Matthias, 2019. "The Risk Elicitation Puzzle Revisited: Across-Methods (In)consistency?," OSF Preprints pj9u2, Center for Open Science.
    14. Simone Cerreia‐Vioglio & David Dillenberger & Pietro Ortoleva, 2015. "Cautious Expected Utility and the Certainty Effect," Econometrica, Econometric Society, vol. 83, pages 693-728, March.
    15. Gary Charness & Thomas Garcia & Theo Offerman & Marie Claire Villeval, 2020. "Do measures of risk attitude in the laboratory predict behavior under risk in and outside of the laboratory?," Journal of Risk and Uncertainty, Springer, vol. 60(2), pages 99-123, April.
    16. Stefan Schiller, 2017. "The Quest for Rationality: Chief Financial Officers’ and Accounting Master’s Students’ Perception of Economic Rationality," SAGE Open, , vol. 7(2), pages 21582440177, April.
    17. Canales, Elizabeth & Bergtold, Jason S. & Williams, Jeffery & Peterson, Jeffrey, 2015. "Estimating farmers’ risk attitudes and risk premiums for the adoption of conservation practices under different contractual arrangements: A stated choice experiment," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205640, Agricultural and Applied Economics Association.
    18. Bartczak, Anna & Chilton, Susan & Meyerhoff, Jürgen, 2015. "Wildfires in Poland: The impact of risk preferences and loss aversion on environmental choices," Ecological Economics, Elsevier, vol. 116(C), pages 300-309.
    19. Peter Wakker & Veronika Köbberling & Christiane Schwieren, 2007. "Prospect-theory’s Diminishing Sensitivity Versus Economics’ Intrinsic Utility of Money: How the Introduction of the Euro can be Used to Disentangle the Two Empirically," Theory and Decision, Springer, vol. 63(3), pages 205-231, November.
    20. Andrea C. Hupman & Jay Simon, 2023. "The Legacy of Peter Fishburn: Foundational Work and Lasting Impact," Decision Analysis, INFORMS, vol. 20(1), pages 1-15, March.
    21. Hans-Martin von Gaudecker & Arthur van Soest & Erik Wengstrom, 2011. "Heterogeneity in Risky Choice Behavior in a Broad Population," American Economic Review, American Economic Association, vol. 101(2), pages 664-694, April.

    More about this item

    Keywords

    Risk perception; Risk preferences; Investment decision; Managerial decision-making;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:beexfi:v:40:y:2023:i:c:s2214635023000552. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-behavioral-and-experimental-finance .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.