Why Managers and Companies Take Risks (Contributions to by Les Coleman

By Les Coleman

The booklet solutions an easy query: whilst managers and corporations face a choice with results which are secure and dicy, what leads them to decide on the dicy replacement? the reply begins with an in depth assessment of the speculation at the back of threat and determination making through managers. The booklet then gathers real-world facts utilizing surveys of senior managers and administrators to research why they take hazards, and the way businesses keep watch over dangers.

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Extra resources for Why Managers and Companies Take Risks (Contributions to Management Science)

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Incorporation of Risk into Decision l\/ldking Theory The mechanics of decision making have fascinated psychologists and other researchers since pioneering consideration by Bernoulli, Leibniz, and Pascal in the 18* century. But the topic lay dormant until narrowed with an analysis of game theory by Von Neuman and Morgenstem (1953), and contributions from Friedman and Savage (1948), and Arrow (1971). Although it quickly ran into trouble with doubts cast by the Allais (1952) paradoxes which exploded into a catalogue of violations [compiled by Machina (1987) and updated in McFadden (1999)], decision making theory was seemingly brought back on track by Prospect Theory [Kahneman and Tversky (1979)].

With this background, let us turn to the evidence on risk and decision making, particularly as it relates to managers. CHAPTER 2 Theory of Risk and Decision Making in Management Decision making and risk are important topics for managers. For instance, Peter Drucker (1992: 374), often proposed as the 'father of modem management', wrote: "Executives do many things in addition to making decisions. But only executives make decisions. " According to Hammond et al. (1998: 47): "making decisions is the most important job of any executive.

In terms proposed by Kahneman and Tversky (1979), utility-based investment analysis may be thought of as determining preferences from risk appetite rather than calculating expected value from probabilistic returns. Because conventional economic analysis only incorporates a portion of the data available to decision makers, adding utility significantly broadens the nature of decision making. Introducing a personalised decision making 2 Theory of Risk and Decision Making in Management 37 component (in this case incorporated in the value of p) re-orders the expected value of decision alternates to take account of the decision maker's risk attitude and thus can change decision makers' preferences between uncertain outcomes.

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