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Prospect Theory, Multiple Anchor Points and Risk-Taking

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Decision-Making and Behavioral Economics Experimental Behavioral Economics Studies Leadership, Behavior, and Decision-Making Studies

Abstract

In this paper, we suggest that the current theorizing in prospect theory does not consider the existence of multiple anchor points. We suggest that individuals when making decisions under risk may consider goals with multiple progressing targets as having differential risk incentives due to upwards and downwards counterfactual thinking. We hypothesize that having multiple targets elicits greater risk-taking response and we consider the role of causal attribution of environmental as a key moderator. We test our theory using a novel granular dataset with performance-based CEO compensation data and a series of laboratory experiments we use to better understand the underlying mechanisms. We find broad support for our theory and consider practical implications.

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