Behavioural Finance in Corporate Decisions: Biases in Managerial Judgment

Abstract

Behavioral finance has become an important field that questions the rationality that is assumed when making the decision in the corporate world. This paper investigates how behavioral biases affect managerial judgment and how the effects of these biases relate to the corporate decision-making process. In a business, managers often have to make a strategic decision on investments, financing, risk management, and business expansion when they are in uncertainty. Cognitive and emotional biases, however, like overconfidence, anchoring, confirmation bias, loss aversion and herd behavior may have a significant impact on the quality of these decisions. The paper examines the implications of these biases for managers' perceptions, resource allocation, and organizational performance. The study will examine theoretical and empirical literature to identify the factors that may contribute to departures from rational corporate behavior, through behavioral processes. The results highlight the need for governance that can address managerial bias, through better management practices, data-informed decision-making support and awareness campaigns of behavioral effects. Understanding these behavioral dimensions can contribute to more effective and sustainable corporate decision-making.