Venice, Italy; FEEM Seminar on: “Performance Thresholds and Optimal Risk Taking “
In many economic decisional problems, agents confront the choice of how much uncertainty to face, solving a trade-off between (average) profitability and risk, like in a portfolio problem. The final outcome for the decision-maker may be subject to thresholds – defined in terms of quality or performance – that apply to the ex-post realisation of the portfolio choice. Performance thresholds may have important consequences on agents’ preferences and lead to strategic behaviours that affect the final outcomes. The paper provides a theoretical framework which allows capturing these effects and discusses a range of potentially interesting applications.