You have no items in your shopping cart.

##### Behavioral Risk Preferences
Technical Note QA-0858 / Published March 24, 2017 / 14 pages. Collection: Darden School of Business
Format Price Quantity Select
\$6.95
\$6.95
Printed Black & White Copy
\$7.25

### Product Overview

MBA students are taught to use the expected monetary value (EV) to evaluate risky opportunities. The reaction of individuals to risk, however, is far more complex. In fact, individuals are rarely found to be consistently risk neutral, risk averse, or risk seeking. They can be all these things, depending on whether the probabilities are small or large, or the outcomes are gains or losses. The purpose of this note is to introduce a behavioral model that modifies EV and does a better job of predicting the perceived value of a risk profile. The model builds on the distinction between probabilities and decision weights, as well as the notions of framing and loss aversion, as put forward by prospect theory. Supplements to the note include a video and an Excel spreadsheet to aid student understanding.

### Learning Objectives

To convince students not to expect individuals to value risks according to expected value To introduce the notions of framing, loss aversion, and decision weights, as put forward by prospect theory To present a behavioral valuation model that replaces the expected value rule.

• Videos List

• Overview

MBA students are taught to use the expected monetary value (EV) to evaluate risky opportunities. The reaction of individuals to risk, however, is far more complex. In fact, individuals are rarely found to be consistently risk neutral, risk averse, or risk seeking. They can be all these things, depending on whether the probabilities are small or large, or the outcomes are gains or losses. The purpose of this note is to introduce a behavioral model that modifies EV and does a better job of predicting the perceived value of a risk profile. The model builds on the distinction between probabilities and decision weights, as well as the notions of framing and loss aversion, as put forward by prospect theory. Supplements to the note include a video and an Excel spreadsheet to aid student understanding.

• Learning Objectives

### Learning Objectives

To convince students not to expect individuals to value risks according to expected value To introduce the notions of framing, loss aversion, and decision weights, as put forward by prospect theory To present a behavioral valuation model that replaces the expected value rule.