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 … influence the agent’s risk attitude. The theory’s predictions help to explain many anomalies that the standard expected utility …

Prospect theory (PT) is the dominant descriptive theory of decision making under risk today. For the modeling of … choices, PT relies on a psychologically founded separation of risk attitudes into attitudes towards outcomes, captured in a … in stakes on risk attitudes. We find that the stake increase is not reflected in the value function, but rather in the …