https://www.sfu.ca/~wainwrig/Econ400/jensen-meckling.pdf

Theory of the firm: Managerial behavior, agency costs and ownership structure

This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low prob- abilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. EXPECTED UTILITY THEORY has dominated the analysis of decision making under risk. It has been generally accepted as a normative model of rational choice (24), and widely applied as a descriptive model of economic behavior, e.g. (15, 4). Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory (47, 36), and that most people actually do, most of the time. The present paper describes several classes of choice problems in which preferences systematically violate the axioms of expected utility theory. In the light of these observations we argue that utility theory, as it is commonly interpreted and applied, is not an adequate descriptive model and we propose an alternative account of choice under risk. 2. CRITIQUE

/pdf/prospect-theory-an-analysis-of-decision-under-risk-4z6oysdahj.pdf

Prospect theory: an analysis of decision under risk

In this paper, we argue that the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities. We label this capability a firm's absorptive capacity and suggest that it is largely a function of the firm's level of prior related knowledge. The discussion focuses first on the cognitive basis for an individual's absorptive capacity including, in particular, prior related knowledge and diversity of background. We then characterize the factors that influence absorptive capacity at the organizational level, how an organization's absorptive capacity differs from that of its individual members, and the role of diversity of expertise within an organization. We argue that the development of absorptive capacity, and, in turn, innovative performance are history- or path-dependent and argue how lack of investment in an area of expertise early on may foreclose the future development of a technical capability in that area. We formulate a model of firm investment in research and development (R&D), in which R&D contributes to a firm's absorptive capacity, and test predictions relating a firm's investment in R&D to the knowledge underlying technical change within an industry. Discussion focuses on the implications of absorptive capacity for the analysis of other related innovative activities, including basic research, the adoption and diffusion of innovations, and decisions to participate in cooperative R&D ventures. **

/pdf/absorptive-capacity-a-new-perspective-on-learning-and-1n1c9gg9x0.pdf

Absorptive capacity: a new perspective on learning and innovation

The dynamic capabilities framework analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change. The competitive advantage of firms is seen as resting on distinctive processes (ways of coordinating and combining), shaped by the firm's (specific) asset positions (such as the firm's portfolio of difftcult-to- trade knowledge assets and complementary assets), and the evolution path(s) it has aflopted or inherited. The importance of path dependencies is amplified where conditions of increasing retums exist. Whether and how a firm's competitive advantage is eroded depends on the stability of market demand, and the ease of replicability (expanding intemally) and imitatability (replication by competitors). If correct, the framework suggests that private wealth creation in regimes of rapid technological change depends in large measure on honing intemal technological, organizational, and managerial processes inside the firm. In short, identifying new opportunities and organizing effectively and efficiently to embrace them are generally more fundamental to private wealth creation than is strategizing, if by strategizing one means engaging in business conduct that keeps competitors off balance, raises rival's costs, and excludes new entrants. © 1997 by John Wiley & Sons, Ltd.

/pdf/dynamic-capabilities-and-strategic-management-4iyi34iyh6.pdf

Dynamic capabilities and strategic management

Measuring the efficiency of decision making units

We explore some of the special problems faced in the management of environmental resources, paying particular attention to valuation of ecosystem services, externalities, uncertainty, and nonlinearities characteristic of complex adaptive, highly interconnected systems. Through consideration of case studies drawn from the management of lake and mangrove ecosystems, we develop a theoretical perspective in which we analyze the challenges, suggest approaches to their resolution, and endeavor to derive principles that may guide management more generally.

https://pubs.acs.org/doi/pdf/10.1021/es990672t

Managing ecosystem resources

Handbooks in economics

The study of information as a choice variable has been given much more weight by disciplines other than economics. This paper tries to lay out the essential economic characteristics of information as an economic commodity. It discusses the reasons why usual market analysis fails and some of the problems that information creates for industrial structure. It is the treatment of information as a variable and its implications for economic behavior that needs further analysis. This is done by giving a formal statement of the role of information in economic decisions based on the use of information and applying it to specific forms of payoff and cost functions. That in many cases information is about rates leads to the conclusion that the value of new technical information is related to the scale of operation. Once information has been obtained its transmission is easy. Therefore it is difficult to make information into property and the incentives to create it will be lacking. In general the analysis shows that the special properties of information as an economic good have strong implications for the very role and meaning of the firm.

The economics of information: An exposition

The importance of the correct choice of discount rate for social (or indeed individual) investments hardly needs elaboration. In the social context, the discount rate is, at least in part, an expression of concerns about equity between the present and future generations and among future generations. I say, in part, because it also expresses both an expectation of the rates of return available to future generations in alternative uses of capital and an expectation of the growth of income of the representative individual.

Inter-Generational Equity and the Rate of Discount in Long-Term Social Investment

The purpose of this paper is to study the logical foundations of the theory of consumer behavior. Preference relations, in terms of which the rationality of consumer behavior is postulated, are precisely defined as irreflexive, transitive, monotone, convex, and continuous relations over the set of all conceivable commodity bundles. A demand function associates with prices and incomes those commodity bundles that the consumer chooses subject to budgetary restraints. It will be shown that if a demand function with certain qualitative regularity conditions satisfies Samuelson's Weak Axiom of Consumer Behavior, there exists a preference relation from which the demand function is derived. On the other hand, the demand functions derived from preference relations satisfy Samuelson's Weak Axiom and those regularity conditions other than the Lipschitz condition with respect to income. Introduction The pure theory of consumer behavior is concerned with the structure of choices of commodity bundles made by a rational consumer when he is confronted with various prices and incomes. A large part of the theory is devoted to explaining the contents in which the rationality of a consumer's behavior is understood (e.g., Hicks, Chap. 1), Samuelson (Chap. 5), Wold and Jureen (Part 2), and Robertson (Part 1, especially pp. 13–20). According to the contributions of Pareto, Slutsky, Hicks and Allen, Wold, and others, it is now fairly generally agreed that the rationality of a consumer's behavior may be described by postulating that the consumer has a definite preference over all conceivable commodity bundles and that he chooses those commodity bundles that are optimum with respect to his preference subject to budgetary constraints.

Kenneth J. Arrow

Papers

Managing ecosystem resources

Handbooks in economics

The economics of information: An exposition

Inter-Generational Equity and the Rate of Discount in Long-Term Social Investment

Preference, production, and capital: Preference and rational choice in the theory of consumption