<abstract xmlns="http://www.w3.org/1999/xhtml"><p>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.</p></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.

Threshold Theory – modelling risk attitude

Financial Internet Quarterly

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

{"article-title":"Threshold Theory \u2013 modelling risk attitude"}

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...

Threshold Theory – modelling risk attitude

Published Online: Aug 06, 2018

Page range: 97 - 109

Received: Jul 14, 2017

Accepted: Dec 15, 2017

DOI: https://doi.org/10.1515/fiqf-2016-0039

Keywords
Decision-making under uncertainty, real options, agency theory, CEO behavior

© 2017 Tomasz Kasprowicz et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Threshold Theory – modelling risk attitude

Published Online: Aug 06, 2018

Page range: 97 - 109

Received: Jul 14, 2017

Accepted: Dec 15, 2017

DOI: https://doi.org/10.1515/fiqf-2016-0039

KeywordsDecision-making under uncertainty, real options, agency theory, CEO behavior

© 2017 Tomasz Kasprowicz et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Keywords
Decision-making under uncertainty, real options, agency theory, CEO behavior