THRESHOLD THEORY – MODELLING RISK ATTITUDE

Journal Title: e-Finanse - Year 2017, Vol 13, Issue 4

Abstract

In this paper we offer an alternative framework for examining why risk matters in the decisions of economic agents, and how the agent’s risk attitude affects his decisions. This “Threshold Theory” framework is based on a real options approach and the observation that in many situations an agent faces one or more thresholds in the payoff function. These thresholds influence the agent’s risk attitude. The theory’s predictions help to explain many anomalies that the standard expected utility model cannot. Threshold Theory can also model behavior in contexts such as individual investor decisions, corporate governance and other agency problems. Further, we examine CEO decisions as a function of time to the CEO’s retirement to test predictions of the Theory.

Authors and Affiliations

Tomasz Kasprowicz, Andrzej Bednorz

Keywords

Related Articles

COMPARISON OF SEMI-PARAMETRIC AND BENCHMARK VALUE-AT-RISK MODELS IN SEVERAL TIME PERIODS WITH DIFFERENT VOLATILITY LEVELS

In the literature, there is no consensus as to which Value-at-Risk forecasting model is the best for measuring market risk in banks. In the study an analysis of Value-at-Risk forecasting model quality over varying econom...

Mandatory Pension Funds in Chile: decline of the arrangement?

Chile has been both a pioneer and the most radical follower of the idea of converting pension savings into contributions to privately-managed capital funds. Two recent portions of reforms under President Bachelet extende...

ECONOMIC RELATIONS BETWEEN PERSONAL AND CORPORATE INCOME TAX

The main goal of this article is to discuss the mutual economic relations between personal and corporate income taxes. The article consists of three parts. The first is an introduction to these taxes and taxation. The se...

MONETARY POLICY IN POLAND – HOW THE FINANCIAL CRISIS CHANGED THE CENTRAL BANK’S PREFERENCES

The aim of the study is to analyze the preferences of the Polish central bank concerning inflation and output gap stabilization and verification, and whether these preferences changed after the beginning of the global fi...

THE SIGNIFICANCE OF OPENNESS AND TRANSPARENCY FOR ACCOUNTABILITY IN PUBLIC FINANCES

An essential condition for asserting responsibility in public finances is that they are open and transparent. The Public Finance Act mentions ways of applying the principles of openness, and also stipulates the entities...

Download PDF file
  • EP ID EP333433
  • DOI 10.1515/fiqf-2016-0039
  • Views 115
  • Downloads 0

How To Cite

Tomasz Kasprowicz, Andrzej Bednorz (2017). THRESHOLD THEORY – MODELLING RISK ATTITUDE. e-Finanse, 13(4), 97-109. https://www.europub.co.uk/articles/-A-333433