Testing Prospect Theory Parameters and the Impact of Human Capital in the Business Domain

Abstract

This paper contributes to the current body of knowledge regarding prospect theory parameter testing in the business domain. The aim of this research was threefold. First, the methodology of Tversky and Kahneman (1992) was used to extract parameters for risk aversion, loss aversion and weighting function from a sample of entrepreneurs. Second, differences in the prospect theory parameters dependent on the business performance were examined. Third, differences in risk preferences based on human capital investments, thus education and parental entrepreneurial background, were tested. Findings showed that entrepreneurs are risk-seeking, have quite low loss aversion and an average ability to estimate probabilities. It was shown that entrepreneurs with a university degree have higher ability to estimate probabilities than entrepreneurs without university education. Regarding business performance, it was shown that entrepreneurs in the stabilization phase were the most risk-seeking, which is contradictory to the reflection effect proposed by Fiegenbaum and Thomas (1988). Results of this research suggest that entrepreneurs differ from other high-achieving individuals in their attitude toward loss rather that risk-seeking attitude.