Abstract
Decision-making process is a multi-faceted and complex process. Decision making can be defined like a process of choosing from among a number of alternatives. It will not contribute enough to be fully understood and to effective decision making to be addressed only from the rational point of view. Behavioral finance is an integral part of the decision-making process. Individuals can improve their performance by recognizing the biases which discussed in the framework of behavioral finance. Understanding the possible negative effects of biases allows to the individuals to make better choices and they can avoid repeating the expensive errors in future. Result of investigations of behavioral biases on decision-makers in the firms, managerial bias issue has been raised. The studies show the effect of managerial biases on many financial decisions in firms. This paper investigated the role of biases such as overconfidence, loss aversion, optimism, anchoring, narrow framing, self-serving attribution, disposition effect etc. on financial decisions such as investing, financing, equity market, capital structure etc. This study review of 30 international studies related with behavioral corporate finance and behavioral biases that affect financial decisions in firms. The studies were gleaned from Web of Science and Google Scholar. The main contribution of this study to the literature is this study brings out the impact of behavioral biases on financial decisions in the firms by summarizing the previous studies. In this sense, this work also has an assembly quality. Therefore, this is also intended with this study that to transfer the knowledge and intellectual formation about the impact of behavioral bias on the financial decisions. In this paper, most important behavioral biases in the behavioral finance literature will be addressed.
Highlights
The questions such as; “what are the determinants of managerial decision-making processes?”, “how is the decisionmaking process of managers?” and “how their psychological and characteristic features are affecting their decisions?” have not been answered fully by management and finance sciences, yet
Google Scholar and the Web of Science (WOS) databases were scanned with the terms of, in quotation marks, “behavioral finance”, “behavioral corporate finance”, “behavioral biases”, “managerial bias”, “psychological bias”, “financial decisions” and “corporate/firm/company decisions” through together and separately
Behavioral finance takes the psychology science and uses it to explain the financial behaviors of the market participants and while doing this, examines the effects of several behavioral and psychological phenomenons on decision making
Summary
The questions such as; “what are the determinants of managerial decision-making processes?”, “how is the decisionmaking process of managers?” and “how their psychological and characteristic features are affecting their decisions?” have not been answered fully by management and finance sciences, yet As it is known, empirical and theoretical studies that are conducted in the field of economics, have a common assumption; “individuals are fully rational decision-makers”. The basic theories of finance and management were derived on the basis of rational acting managers in terms of interests of shareholders, can create value by minimizing the potential effects of some factors such as taxes, bankruptcy costs, transaction costs, information asymmetries and diversified stakeholders. It is observed that behavioral corporate finance or administrative prejudices have little or no work considering the issue of the number of field work
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