Why a Decision Maker May Prefer a Seemingly Unfair GambleArun J. Prakash, Chun-Hao Chang, and Shahid HamidCollege of Business Administration, Florida International University, Miami, FL 33199 Michael W. Smyser AbstractIt is generally believed that risk-averse managers will not accept unfair gambles and therefore may not have the incentive to invest in high-risk projects, products or technology. This paper argues that this is not necessarily so. Rational, risk-averse managers with sufficient preference for positive skewness may undertake projects with payoff distributions that are unfair gambles. Furthermore, the minimum required payoff is shown to be less for managers with preference for positive skewness than otherwise. Thus, a risk-averse manager with preference for positive skewness may accept potentially innovative high-risk projects that are rejected by those without such preference.Subject Areas Capital Budgeting, Decision Analysis, Risk and Uncertainty, and Utility Theory. |