Fixed versus variable reference points in the risk-return relationship

Richard Z. Gooding, Sanjay Goel, Robert M. Wiseman

Research output: Contribution to journalArticle

53 Scopus citations

Abstract

Researchers using prospect theory in explaining Bowman's 1 risk-return paradox have typically assumed a single fixed reference point, normally the industry median, in defining two decision contexts: gain and loss. Our findings suggest this reference point is elevated above industry median performance, and varies over time and across industries independent of industry performance. Consistent with prospect theory, firms above this reference point were risk averse and those below it were risk seeking. We found no evidence of a second survival reference point for firms in trouble.

Original languageEnglish (US)
Pages (from-to)331-350
Number of pages20
JournalJournal of Economic Behavior and Organization
Volume29
Issue number2
DOIs
StatePublished - Mar 1996

Keywords

  • Prospect theory
  • Risk-return paradox
  • Variable risk preferences

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