Financial forecasting and risky decisions: an experimental study grounded in Prospect theory

Rodney C. Shrader (), Mark Simon and Steven Stanton
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Rodney C. Shrader: University of Illinois at Chicago
Mark Simon: University of Michigan—Flint
Steven Stanton: Oakland University

International Entrepreneurship and Management Journal, 2021, vol. 17, issue 4, No 13, 1827-1841

Abstract: Abstract This study employed prospect theory to examine relationships between effort invested in developing financial forecasts and risk taking. Results of an experimental study indicated that the more effort subjects invested in developing forecasts, the more likely they were to use those forecasts as their reference points when evaluating venture performance. Results also indicated that subjects who used forecasts as their reference points and exerted greater effort developing those forecasts were more likely to take risky actions when performance fell below their reference points. This study is the first to link effort to the type of reference point used and the first to link effort and the use of financial forecasts to risky decisions. In addition, it is one of only a few studies to employ prospect theory to examine risk taking decisions subsequent to start-up. Its results enhance our understanding of risk taking, prospect theory and reference points.

Keywords: Risk taking; Financial forecasting; Prospect theory (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11365-020-00697-4

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