Prospect theory

Philip Bromiley and Devaki Rau

Chapter 15 in A Guide to Key Theories for Strategic Management, 2026, pp 268-287 from Edward Elgar Publishing

Abstract: This chapter provides an overview of prospect theory and cumulative prospect theory. It examines similarities and differences between prospect theory and other popular theories in strategic management that, like prospect theory, are used to predict risk-taking. These other theories include the behavioral theory of the firm, the behavioral agency model, and myopic loss aversion. The chapter also examines prospect theory's impact on strategic management research in the areas of executive compensation, firm decisions in response to performance above or below aspirations, and decisions made by family firms. The chapter concludes with a brief look at some of the criticisms of the use of prospect theory in strategic management research.

Keywords: Prospect Theory; Cumulative Prospect Theory; Reference Point; Loss Aversion; Framing; Risk Taking (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035342846
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