ATTITUDE TOWARD RISK AND THE RISK RETURN PARADOX PROSPECT THEORY EXPLANATIONS

Attitudes toward Risk and the Risk-Return Paradox: Prospect Theory Explanations
Author(s): Avi Fiegenbaum and Howard Thomas
Source: The Academy of Management Journal, Vol. 31, No. 1 (Mar., 1988), pp. 85-106
Published by: Academy of Management
Stable URL: http://www.jstor.org/stable/256499
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Academy of Management Journal
1988, Vol. 31, No. 1, 85-106.

ATTITUDES TOWARD RISK
AND THE RISK-RETURN PARADOX:
PROSPECT THEORY EXPLANATIONS
AVI FIEGENBAUM
University of Michigan
HOWARD THOMAS
Illinois at Urbana-Champaign of University
Massachusetts Institute of Technology
This study attempted to explain Bowman 's risk-return paradox in terms of recent research in behavioral decision theory and prospect theory.
The research emphasized the role of reference, or target, return levels in analyzing risky choices. For returns below target, a large majority of individuals appear to be risk seeking; for returns above target, a large majority appear to be risk averse. Using extensive COMPUSTAT-based data on U.S. firms, we consistently found a negative risk-return association for firms having returns below target levels and a positive association for firms with returns above target. These

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