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Threshold Theory – modelling risk attitude

Author

Listed:
  • Kasprowicz Tomasz

    (The University of Dąbrowa Górnicza)

  • Bednorz Andrzej

    (The University of Dąbrowa Górnicza)

Abstract

In this paper we offer an alternative framework for examining why risk matters in the decisions of economic agents, and how the agent’s risk attitude affects his decisions. This “Threshold Theory” framework is based on a real options approach and the observation that in many situations an agent faces one or more thresholds in the payoff function. These thresholds influence the agent’s risk attitude. The theory’s predictions help to explain many anomalies that the standard expected utility model cannot. Threshold Theory can also model behavior in contexts such as individual investor decisions, corporate governance and other agency problems. Further, we examine CEO decisions as a function of time to the CEO’s retirement to test predictions of the Theory.

Suggested Citation

  • Kasprowicz Tomasz & Bednorz Andrzej, 2017. "Threshold Theory – modelling risk attitude," Financial Internet Quarterly (formerly e-Finanse), Sciendo, vol. 13(4), pages 97-109, December.
    • Handle: RePEc:vrs:finiqu:v:13:y:2017:i:4:p:97-109:n:10
    DOI: 10.1515/fiqf-2016-0039
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    References listed on IDEAS

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    More about this item

    Keywords

    Decision-making under uncertainty; real options; agency theory; CEO behavior;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M15 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - IT Management
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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