Why Managers and Companies Take Risks

This book uses risk in its dictionary meaning as the probabiHty of an unde- sirable outcome, and has two research questions: when managers make de- cisions, what leads them to choose a risky alternative? and: what deter- mines whether the decision proves correct? Answers to these questions form a model of decision making that explains the process and results of managers' risk-taking in the real world. There is an extensive literature on risk and decision making because the topic has been of interest in many disciplines since at least the 18^^ century. Thus insights on the research questions are available from studies of ani- mals, humans and organisations; and have been drawn by scholars in biol- ogy, psychology, finance and management. Even so, there is a large gap as most studies are conducted away from corporate settings and use subjects with limited decision experience. The few studies set in real-world condi- tions tend to concentrate on just a single aspect of decision makers' attrib- utes, setting and behaviour, and on either decision choices or outcomes. The empirical work in this book is designed to fill part of this gap.