ABSTRACT
This chapter addresses manager's risk propensity and examines why companies take risks. It reports the findings of studies that examine the drivers of risk, starting with consideration of two key concepts: Prospect Theory and risk-sensitive foraging that explain many of the differences between people and firms in their risk propensity. The chapter follows the descriptive approach and looks in detail at why managers' risk propensity varies and how biases affect their risk taking. It draws heavily from Coleman, and covers the subject of behavioural finance, which now has an extensive literature, with surveys provided by Barberis and Thaler, Camerer, Kahneman, Rabin and Ricciardi. Reference levels encompass the essence of risk-sensitive foraging which is that decision makers alter their risk preference around a satisfying level, or endowment which meets requirements at the time. Thaler develops the concept of mental accounting in which decision makers apportion their wealth, knowledge and other resources into discrete and non-fungible mental accounts.
