Prospect theory and the risk-return association : An empirical examination in 85 industries

Abstract

A new sample of 85 industries (about 3,300 firms) defined in terms of homogenous products provides strong evidence that prospect theory can explain the tradeoff between two of the most researched parameters in evaluating organizations, namely, risk and return. In particular, organizations below their target level are found to be risk-takers (H1) while organizations above their target level are risk-averters (H2); moreover, the below target tradeoff was generally steeper than the above target with a median below to above slope ratio of about 3:1 (H3).