Change search
ReferencesLink to record
Permanent link

Direct link
The Risk-Return Relationship: Can the Prospect Theory be Applied to Small Firms, Large Firms and Industries Characterized by Different Asset Tangibility?
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
2016 (English)Independent thesis Advanced level (professional degree), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

In 1979 Daniel Kahneman and Amos Tversky created the prospect theory. It became an accepted and appropriate theory in explaining decision making under risk. The prospect theory has been one of the most cited articles in economics and Kahneman received the Nobel Prize in Economic Sciences as a result of the creation and development of the theory. Therefore the prospect theory is considered to be more suitable compared to the previously accepted theory, the expected utility theory. Following the prospect theory, researchers have utilized it to describe individual but also corporate management decision making when faced with risk. In this thesis the authors will focus on the latter.

Despite the prospect theory being a well-accepted theory, there have been several critics due to its limitations and Audia and Greve (2006) are one of these critics. Their study suggested that corporations under threat, i.e. small firms with low returns, act risk averse. The findings of Audia and Greve (2006) violate the prospect theory when considering small firms that have below target returns. They tested the theory on an industry that has the characteristics of having relatively high proportions of tangible assets. Audia and Greve (2006) also proposed that a similar conclusion could be drawn if tested on an industry characterized by having a high level of intangible assets. This thesis examines the applicability of the prospect theory in the Swedish automotive industry and staffing and recruitment industry. The characteristics of the two industries are that the automotive industry has a high proportion of tangible assets and the staffing and recruitment industry has a high level of intangibles. The authors test if the prospect theory can be used to describe the decision making of both industries but also test the theory on small and large firms.

Following the results of this paper we show that the prospect theory can be applied to the Swedish automotive industry and staffing and recruitment industry, characterized by having high levels of tangible assets and intangible assets respectively. The theory can also be used to explain decision making under risk for small firms within both industries and large firms within the automotive industry. Even though the prospect theory was originally tested on individuals, the conclusion can be drawn that the prospect theory once again prevails as an explanation of the decision making in the management of corporations. It can describe the decision making of firms in the two industries having characteristics of different asset tangibility and for firms of different size.

Place, publisher, year, edition, pages
2016. , 81 p.
Keyword [en]
Prospect theory, Expected utility theory, Tangible assets, Intangible assets, Decision making, Behavioral decision theory, Risk-return relationship, Risk-return paradox
National Category
Business Administration
URN: urn:nbn:se:umu:diva-122846OAI: diva2:941819
Educational program
Study Programme in Business Administration and Economics
Available from: 2016-07-07 Created: 2016-06-22 Last updated: 2016-07-07Bibliographically approved

Open Access in DiVA

fulltext(1636 kB)37 downloads
File information
File name FULLTEXT01.pdfFile size 1636 kBChecksum SHA-512
Type fulltextMimetype application/pdf

By organisation
Business Administration
Business Administration

Search outside of DiVA

GoogleGoogle Scholar
Total: 37 downloads
The number of downloads is the sum of all downloads of full texts. It may include eg previous versions that are now no longer available

Total: 59 hits
ReferencesLink to record
Permanent link

Direct link