Friday, March 19, 2021

g-f(2)173 THE BIG PICTURE OF THE DIGITAL TRANSFORMATION, 3/18/2021, Knowledge@Wharton, How Biases Influence CEOs Throughout Their Careers.




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  • CEOs are equally vulnerable to biases, according to a new research paper titled “Behavioral Corporate Finance: The Life Cycle of a CEO Career,” by Wharton finance professor Marius Guenzel and Ulrike Malmendier, professor of finance and economics at the University of California, Berkeley. 
    • By documenting how biases affect even the most educated and influential decision-makers, such as CEOs, the field has generated important insights into the hard-wiring of biases. 
    • Biases do not simply stem from a lack of education, nor are they restricted to low-ability agents. Instead, biases are significant elements of human decision-making at the highest levels of organizations.
    • The “rational-manager paradigm” makes presumptions on three fronts: (a) selection, (b) learning, and (c) market discipline, the paper stated. 
      • In the “selection” aspect, it is presumed that corporate managers “are smart and highly educated,” and therefore not susceptible to the biases of consumers and investors. 
      • In the “learning” aspect, they are expected to learn from “occasional mistakes,” and then “update rationally and optimize” their decisions in the future. 
      • The “market discipline” aspect is where managers are closely monitored by their boards and the market, “keeping any bias-driven errors at bay.”
    • However, that line of reasoning is flawed, according to behavioral corporate finance research over the past 15 years or so, the researchers wrote in their paper
    • “We focus on managerial biases and how these biases play a role in each of the different career phases – CEO appointments, the CEO being at the helm of the firm, and then being dismissed eventually,” said Guenzel. “The traditional arguments for why a CEO, we would think, is rational are CEO selection, learning and market discipline. 
      • Our contribution is to say that it’s not clear that these arguments are sufficient to prevent biased decision-making at the very top of organizations.”
    • CEO overconfidence could also seep into decisions on hiring other members of the executive team. “If I’m an overconfident CEO, I might prefer a chief financial officer who has similar viewpoints as me,” said Guenzel. 
      • “Having people next to you that think like you and behave like you can accelerate or intensify bad decision-making at the top, when we have biased decision-makers.”

    Category 2: The Big Picture of the Digital Age

    [genioux fact produced, deduced or extracted from Knowledge@Wharton]

    Type of essential knowledge of this “genioux fact”: Essential Analyzed Knowledge (EAK).

    Type of validity of the "genioux fact". 

    • Inherited from sources + Supported by the knowledge of one or more experts + Supported by research.

    Authors of the genioux fact

    Fernando Machuca


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