The prospect theory is one of the most popular decision-making theories. It is based on the S-shaped utility function, unlike the von Neumann and Morgenstern (NM) theory, which is based on the concave utility function. The S-shape brings in mathematical challenges: simple extensions and...

This paper examines the interplay between the real and financial decisions of the competitive firm under output price uncertainty. The firm faces additional sources of uncertainty that are aggregated into a background risk. We show that the firm always chooses its optimal debt-equity ratio to...

We estimate the effect of demand and price uncertainty on firms' investment decisions from a panel of manufacturing firms. Uncertainty measures are derived from firms' subjective qualitative expectations. They are close to their theoretical counterparts, the variances of future demand and price...

This paper deals with the risk of opportunism – the usual risk in economic exchanges. The breach of contract is probably the most common event in daily life and has therefore attracted research and debates in many disciplines of the social sciences. Our discussion deals with the current...

How much do informational constraints impact economic outcomes? This paper applies a computational modeling strategy to inventory purchasing decisions. Known as the “newsvendor problem”, statistics theory has found optimal heuristics for firm behavior in conditions of unpredictable consumer...

The paper examines the risk behavior of a competitive firm under price uncertainty. In the model developed in the paper we have departed from the thought-provoking approach of Greenwald and Stiglitz (1993a), which implies solely risk averse behavior of firms due to its restrictive assumptions...

In this paper we consider how the degree of risk aversion, and demand/cost uncertainty, influence competition on oligopolistic markets. Under demand uncertainty, the best response strategies (both quantities and prices) are decreasing in risk aversion, but for cost uncertainty, quantities are...

This paper uses four different disappointment models to examine the production decision of the competitive firm under uncertainty when the firm is not only risk-averse, but also disappointment-averse. We show the conditions under which the disappointment-averse firm will produce less than its...

We present a new mechanism for encouraging risk taking within organizations that relies on the provision of decision insurance to managers. Since insurance increases the likelihood of free riding, we also introduce a technique that mitigates this moral hazard by automatically identifying the...