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Prospect Theory and Strategic Decision-Making

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The Palgrave Encyclopedia of Strategic Management

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Abstract

Prospect theory is one of the most influential theories of decision-making under risk. The theory draws on psychology and has been proposed as an alternative to expected utility theory. It substitutes a value function for the utility function, and a decision weights function for probabilities. Its main ideas are that changes in wealth are more important than absolute levels of wealth for describing risk-taking, and that decision weights is a non-linear function of probability. We describe the theory’s main assumptions and its effects on strategy research and suggest a possible direction for its use in future research.

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Author information

Authors and Affiliations

  1. New York University, Stern School of Business, New York, NY, 10012, USA

    Galia Rosen-Schwarz & Zur Shapira

Authors
  1. Galia Rosen-Schwarz
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  2. Zur Shapira
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Corresponding author

Correspondence to Zur Shapira .

Editor information

Editors and Affiliations

  1. GSBPP, Naval Postgraduate School, Monterey, CA, USA

    Mie Augier

  2. Berkeley Research Group, LLC, Emeryville, CA, USA

    David J. Teece

  3. Haas School of Business, University of California, Berkeley, Berkeley, CA, USA

    David J. Teece

Copyright information

© 2018 The Author(s)

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Rosen-Schwarz, G., Shapira, Z. (2018). Prospect Theory and Strategic Decision-Making. In: Augier, M., Teece, D.J. (eds) The Palgrave Encyclopedia of Strategic Management. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-00772-8_560

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