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

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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.

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Authors and Affiliations

  1. Denton Thorne Chair in Entrepreneurship, College of Business Administration, University of Illinois at Chicago, 815 W Van Buren St., Suite 400, Chicago, IL, 60607, USA

    Rodney C. Shrader

  2. School of Management, University of Michigan—Flint, 2129 Riverfront Center Building, 303 East Kearsley Street, Flint, MI, 48502, USA

    Mark Simon

  3. 420 Elliott Hall, Oakland University, 275 Varner Drive, Rochester, MI, 48309-4485, USA

    Steven Stanton

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  1. Rodney C. Shrader
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  2. Mark Simon
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  3. Steven Stanton
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Correspondence to Rodney C. Shrader.

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Shrader, R.C., Simon, M. & Stanton, S. Financial forecasting and risky decisions: an experimental study grounded in Prospect theory. Int Entrep Manag J 17, 1827–1841 (2021). https://doi.org/10.1007/s11365-020-00697-4

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