What Is Risk to Managers?

In an online experiment with a sample of 4,287 managers from small- and medium-sized enterprises in Denmark, we present participants with scenario-dependent out-comes of a hypothetical investment prospect in a business context and elicit their perception of risk associated with the project and their perception of the invest-ment’s attractiveness. The experimental data is merged with a set of background variables on the company from the Danish registry, which allows controlling for firm-specific effects. We find that risk perception is driven by the likelihood and the return associated with the worst-case scenario as well as the size of the required in-vestment. Managers’ perception of attractiveness is affected not only by the worst-case scenario but also by the characteristics of the base-case and the best-case out-comes. Furthermore, we provide evidence that managers’ perception of the project’s attractiveness is significantly associated with their individual-level risk preferences and the interaction effect with risk perception. This implies that not only the char-acteristics of the different scenarios but also individuals’ risk preferences play an important role when assessing the attractiveness of a business opportunity.