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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. Leonard N Stern School of Business, New York, NY, 10012, USA

    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. Stanford University , Stanford, California, USA

    Mie Augier

  2. Tusher Ctr Intellectual Capital, University of California Tusher Ctr Intellectual Capital, Berkeley, California, USA

    David J. Teece

Copyright information

© 2016 The Author(s)

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Rosen-Schwarz, G., Shapira, Z. (2016). Prospect Theory and Strategic Decision-Making. In: Augier, M., Teece, D. (eds) The Palgrave Encyclopedia of Strategic Management. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-94848-2_560-1

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  • DOI: https://doi.org/10.1057/978-1-349-94848-2_560-1

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  • Publisher Name: Palgrave Macmillan, London

  • Online ISBN: 978-1-349-94848-2

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