Financial Forecasting, Risk-taking and Venture Performance

Abstract

This conceptual paper develops a model based on prospect theory that explores how the effort entrepreneurs expend developing financial forecasts may influence risk-taking and performance. It proposes that the more effort they expend on developing forecasts, the more likely they will be to use the results of the forecasts as reference points against which they evaluate their ventures’ future performance. Furthermore, we propose that effort leads to more optimistic reference points that are less likely to be adjusted. Our model suggests that these factors are related to subsequent risk-taking by entrepreneurs. The model further suggests that, for entrepreneurs, the relationship between risk-taking and performance is moderated by the level of utility the entrepreneur experiences from venture performance.