THE EFFECT OF MULTIPLE REFERENCE POINTS AND PRIOR GAINS AND LOSSES ON MANAGERS RISKY DECISION-MAKING

This study examines the impact of two contextual features of decision settings on managers' risky behavior. Considerable research indicates that decision makers exhibit risk avoiding or risk taking behavior depending upon whether options are viewed as gains or losses with respect to a given reference point. We argue in this paper that multiple points of reference are important determinants of risky behavior in many decision contexts, and that research should explicitly consider their effect to fully understand and predict risky behavior. The analysis of contextual features is extended to consider the impact of prior gains and losses in the second part of the paper. Seventy-two professional corporate managers participated in two experiments that involved a corporate investment decision setting. The setting exemplifies a context that has both multiple important points of reference and prior gains and losses. The data indicated that the presence of multiple relevant reference points results in a complex pattern of risky behavior, where managers' decisions to accept or avoid risk were affected by the relative positions of risky alternatives with respect to two important points of reference. In particular, a mixture of risk taking and risk avoiding occurred for options between the relevant reference points. The managers were also found to be more willing to accept risk after experiencing a prior gain as opposed to a prior loss. These findings point to the importance of considering such task characteristics when attempting to predict and understand risky behavior across a variety of task contexts. (C) 1995 Academic Press, Inc.