Survey of Capital Budgeting: Theory and Practice

Mao, James C. T.

doi:10.2307/2325481

Cited by 82 publications

(42 citation statements)

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“…The other half of the story can be found in protocol data. Studies by Mao (1970) and by Petty and Scott (cited in suggest that managers tend to define investment risk as the probability of not achieving a target rate of return (that is to say, an aspiration level).…”

Section: Risk Taking and Aspiration Levelmentioning

confidence: 99%

The Role of Aspiration Level in Risky Choice: A Comparison of Cumulative Prospect Theory and SP/A Theory

Lopes

Oden

1999

Journal of Mathematical Psychology

312

239

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In recent years, descriptive models of risky choice have incorporated features that reflect the importance of particular outcome values in choice. Cumulative prospect theory (CPT) does this by inserting a reference point in the utility function. SP/A (security-potential/aspiration) theory uses aspiration level as a second criterion in the choice process. Experiment 1 compares the ability of the CPT and SP/A models to account for the same within-subjects data set and finds in favor of SP/A. Experiment 2 replicates the main finding of Experiment 1 in a between-subjects design. The final discussion brackets the SP/A result by showing the impact on fit of both decreasing and increasing the number of free parameters. We also suggest how the SP/A approach might be useful in modeling investment decision making in a descriptively more valid way and conclude with comments on the relation between descriptive and normative theories of risky choice.

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Section: Risk Taking and Aspiration Levelmentioning

confidence: 99%

The Role of Aspiration Level in Risky Choice: A Comparison of Cumulative Prospect Theory and SP/A Theory

Lopes

Oden

1999

Journal of Mathematical Psychology

312

239

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“…1. Interestingly, Mao (1970) presented similar lotteries to a sample of professional risk managers, who largely displayed an aversion to downside risk. This may be seen as an early experiment on risk preferences.…”

Section: The Saga Continuesmentioning

confidence: 81%

“…1 "Mao's lotteries," as similar lotteries were introduced by Mao (1970). Observe that going from lottery A to lottery B reflects the basic tradeoff induced by a self-protection choice, as it increases the probability of the good state (from 1/4 to 3/4) but decreases wealth in both states by one unit.…”

mentioning

confidence: 99%

Risk and choice: A research saga

2013

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The economic theory of decision making under risk has seen remarkable advances over the 50 years since Pratt's (1964) characterization of risk aversion under expected utility. We review developments in three key areas to which Louis Eeckhoudt has made significant contributions: (1) increases in risk and risk taking; (2) self-protection and risk aversion; and (3) higher (and lower) order derivatives of utility. For each, we identify seminal papers, puzzles, and recent developments. The saga of research on these topics reveals that important contributions were made long ago and yet significant gains in understanding continue to be made. Recent advances often have roots in early results and researchers can profit by examining the old as well as the new papers.

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“…In contrast, the probability of constraint violation, or more generally of not meeting a target, is more intuitive and often easy for the decision maker to set. Indeed, extensive empirical study shows that in daily decision making, risk is primarily considered by decision makers as failure to meet a prespecified target (e.g., Lanzillotti 1958;Simon 1959;Mao 1970;Payne et al 1980Payne et al , 1981. We remark that the term envelope constraint appeared as early as the 1970s in the field of signal processing, see for example Evans et al (1977a, b) and more recently Vu et al (1997).…”

Section: Condition 1 (General Setup)mentioning

confidence: 84%

Optimization Under Probabilistic Envelope Constraints

Caramanis

Mannor

2012

Operations Research

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Chance constraints are an important modeling tool in stochastic optimization, providing probabilistic guarantees that a solution "succeeds" in satisfying a given constraint. Although they control the probability of "success," they provide no control whatsoever in the event of a "failure." That is, they do not distinguish between a slight overshoot or undershoot of the bounds and more catastrophic violation. In short, they do not capture the magnitude of violation of the bounds. This paper addresses precisely this topic, focusing on linear constraints and ellipsoidal (Gaussian-like) uncertainties. We show that the problem of requiring different probabilistic guarantees at each level of constraint violation can be reformulated as a semi-infinite optimization problem. We provide conditions that guarantee polynomial-time solvability of the resulting semi-infinite formulation. We show further that this resulting problem is what has been called a comprehensive robust optimization problem in the literature. As a byproduct, we provide tight probabilistic bounds for comprehensive robust optimization. Thus, analogously to the connection between chance constraints and robust optimization, we provide a broader connection between probabilistic envelope constraints and comprehensive robust optimization.

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Survey of Capital Budgeting: Theory and Practice

Cited by 82 publications

References 0 publications

The Role of Aspiration Level in Risky Choice: A Comparison of Cumulative Prospect Theory and SP/A Theory

The Role of Aspiration Level in Risky Choice: A Comparison of Cumulative Prospect Theory and SP/A Theory

Risk and choice: A research saga

Optimization Under Probabilistic Envelope Constraints

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