The presence of managerial overconfidence in strategic capital investment decision-making

Abstract

Managerial judgement has been long recognised to have a part in strategic capital investment decision-making as opposed to only highlighting outcomes of traditional financial evaluation methods. However, managerial judgement is susceptible to different cognitive distortions of which in this thesis managerial overconfidence is in the spotlight. This bias has been chosen as a focus due to prior findings suggesting that outcomes of investments do not correspond with original estimates and show tendency towards overconfidence.

Managerial overconfidence is a bias that has been quite well documented related to various decision-making situations in prior finance and psychology research specifically. Here it is observed in relation to strategic capital investment decision-making due to its relevance to companies’ function. The aim is to investigate the position managerial overconfidence has in strategic capital investment decision-making by reviewing prior finance, accounting and psychology research of proper suitability. The prior conclusions will then be combined to produce an overview that serves in the context of strategic capital investments.

The paper finds that the role of managerial overconfidence in strategic capital investment decision-making is notable. Overconfidence bias becomes apparent through examining the emerging of managerial judgement generally. In addition, many of the conclusions offered by previous literature on the connection between managerial overconfidence - or managerial judgement in general - and different financial decision settings are applicable to strategic capital investment appraisal due to similar basis.