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1、±±±±±±±±±±±±±±±±±±±BEHAVIORAL±±±±±±CHAPTER±±±±16±±±±CORPORATEFINANCE±ANDMANAGERIALDECISION-MAKING16.1INTRODUCTIONInitialinterestinbehavioralexplanationsoffinancialdecisionswasprimarilyintherealmofchoicesmadebyinvestors.Oflate,moreattentionhasbeenpaidtosub-1optimaldecisionsmadebyfirms’managersande
2、ntrepreneurs.Thestresshas2beentheextenttowhichoverconfidenceimpactsthedecisionsoftheseindividuals.Inthefollowingsection,webeginwithpossiblemistakesinthecapitalbudgetingprocesspotentiallycausedbycognitiveandemotionalforces.Next,inSection16.3,aftercitingsomeevidencethatmanagersarenodifferentfromthe
3、restofthepopulationintermsoftheiroverconfidence,weturntotheconsequences.Muchresearchhasbeendevotedtotheimpactofoverconfidenceonvariousformsofinvestment.InSection16.4,wewillfocusonoverinvestment,investmentsensitivity3tocashflows,mergersandacquisitions(M&As),andstart-ups.Finally,webrieflyconsiderwh
4、ethermanagerialoverconfidencehasapositiveroletoplay.16.2CAPITALBUDGETING:EASEOFPROCESSING,LOSSAVERSIONANDAFFECTItislikelythatbehavioralflawsimpactcapitalbudgetingdecisions.Specifically,weconsiderthestillwide-spreaduseof(patentlyinferior)paybackasaprojectselec-tiontechnique,thetendencytothrowgoodm
5、oneyafterbad(sunkcosts),andtheproclivitytoallowirrelevantinformationtoinfluenceprojectadoption.279280CHAPTER16PAYBACKANDEASEOFPROCESSINGConventionalfinancetheorydemonstratesthat,whenproperlyapplied,netpresent4value(NPV)istheoptimaldecisionruleforcapitalbudgetingpurposes.Yetanumberofsurveysshowtha
6、tmanagersoftenutilizeless-than-idealtechniques,such5astheinternalrateofreturn(IRR)and,evenworse,payback.Ithasbeensug-gestedthatonereasonforthedurabilityofsuchrulesisthattheyareeasiertopro-6cessandaremoresalient.Thedesirabilityofgettingyourmoneybackquickly(asreflectedinpayback)isobvioustoeventhemo
7、stunsophisticatedobserver,thoughmanydonotrealizethatanypaybackbenchmarkcanonlybearbitrary.SomewhatlessintuitiveisIRR,butacomparisonbetweentheproject’sestimatedreturnanditscostofcapitalisstillquitecompelling.NPV,whichis
