his article presents a realistic view of the strategic process in small and medium-sized enterprises (SMEs). The study integrates prospect theory and strategic reference point theory: strategic choices depend on how the decision maker perceives the situation in relation to the reference and the risk being taken. Applying Rasch models to a sample of firms in the Canary Islands (Spain), the results show that SMEs that are more influenced by external references take higher risks. These enterprises differ in their strategic choices from those that do not focus on external references in the greater importance they attach to market diversification. This study is pioneer in considering the internal and external dimension of references that SME managers have in mind and linking them, via prospect theory (Kahneman, Tversky 1979), to the risk they take in their strategic choices. It also has the added value of applying Rasch Measurement Theory.