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This golden knowledge podcast from Knowledge@Wharton explores how biases influence CEOs throughout their careers.
CONTEXT

g-f(2)151 The Big Picture of the Digital Transformation, 3/1/2021, geniouxfacts, How To Succeed At Business Digital Transformation.
g-f(2)153 The Big Picture of Business Artificial Intelligence (3/3/2021) in a Single “g-f KBP” Chart

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.

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CONTEXT

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

References

How Biases Influence CEOs Throughout Their Careers, Wharton Business Daily, February 23, 2021, Knowledge@Wharton.

ABOUT THE AUTHORS

WHARTON BUSINESS DAILY

Listen to the Wharton Business Daily show on SiriusXM channel 132, Monday through Friday from 10 a.m. to 12 noon. Host Dan Loney goes behind the headlines of the world’s biggest business stories with Wharton faculty and expert guests. Highlights from past shows are featured below.

Dan Loney

Host - Wharton Business Daily

Twitter account: @DanLoney21

Dan Loney’s broadcasting career has included more than 25 years in the realm of sports, news and business on a variety of formats, including national radio networks The Wall Street Journal Radio Network, ABC Radio and ESPN Radio. On the field, his broadcasting career has included play-by-play for more than 2,100 professional baseball games on the radio and another 500 on television, including work for the YES Network and CN8. His abilities behind the microphone have led to work with several universities in the Philadelphia region, including Princeton University and now, The Wharton School at the University of Pennsylvania.