Shefrin & Statman (2000) explain how the types of decision-maker characteristics encompassed within behavioural models of choice such as Lopes’ (1987) SP/A theory8 and Kahneman &Tversky’s (1979) prospect theory lead decision-makers away from the efficient set (though there is a twist to the story that we shall come to in a moment). In their first iteration of BPT, which they call BPT-SA, Shefrin & Statman (2000) develop a picture of the decision-making process in which combinations of risky prospects are formed into a single account (SA) in a manner that is somewhat similar to the mean-variance decision-maker’s approach. The correlations are considered and the decision-maker prefers a higher mean (E) payoff and lower variance (V).The only psychological variable governing choice in MPT is risk aversion. Following Lopes (1987), Shefrin & Statman (2000) build a BPT where the decision-maker’s expectations are distorted by their fears, hopes and aspirations in addition to their risk aversion. The interplay of these factors distorts the decision-maker’s view of the opportunities and makes them very concerned about obtaining an outcome above some aspiration level. Once these emotional factors are added to MPT, the model is transformed into BPT-SA. Now a multitude of emotional and psychological variables shape the choices that are made.

Perhaps the most important difference in the choices that might be made by a BPT-SA decision-maker vis-a-vis an MPT-(EK) decision-maker is that it might very well be ‘efficient’ under some particular circumstances for the BPT-SA decision-maker to choose a risky prospect that has a low expected payoff and a very high level of risk or variance. While the outcome will probably be a loss, the high level of variance means that there is great upside potential. Choosing such a risky prospect is something that an MPT decision-maker would never knowingly do because such a risky prospect will usually lie on the underneath edge of the opportunity set and will be dominated by many other alternatives. The BPT-SA decision-maker will do so, however, if the high variance is necessary to improve the chances that the aspiration level will be met and there is no equally volatile risky prospect with a higher expected outcome.9 Only when a situation arises that is analogous to being locked in a casino with just one night to make enough money to meet a high aspiration level should we expect these choices to be made. It is conceivable that an analogous situation could arise for a terrorist group. Allowing decision-makers to have an aspiration level is how BPT-SA can extend the application of MPT.

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