Clarifying Managerial Biases Using a Probabilistic Framework
Journal of Behavioral and Experimental Finance
24 Pages Posted: 26 May 2020 Last revised: 15 Jan 2021
Date Written: April 27, 2020
Abstract
A unified probabilistic framework is developed to analyze and compare the impact of the psychological biases of overconfidence and underconfidence on managerial perceptions about the expected value, overall risk, downside risk, value-at-risk (VaR) and expected shortfall (ES) of decision-making economic variables. The results depict that overconfident managers overestimate their expected values and underestimate downside risk, VaR and ES of decision-making variables. Underconfident managers, on the other hand, underestimate their expected values and overestimate
Keywords: Downside risk; expected shortfall; probability miscalibration; psychological biases; skewed normal distribution; value-at-risk.
JEL Classification: G4, C46
Suggested Citation: Suggested Citation