Behavioral Corporate Finance: The Life Cycle of a CEO Career

One of the fastest-growing areas of finance research is the study of managerial biases and their implications for firm outcomes. Since the mid 2000s, this strand of Behavioral Corporate Finance has provided theoretical and empirical evidence on the influence of biases in the corporate realm, such as overconfidence, experience effects, and the sunk-cost fallacy. The field has been a leading force in dismantling the argument that traditional economic mechanisms— selection, learning, and market discipline—would suffice to uphold the rational manager paradigm. Instead, the evidence reveals behavioral forces to exert a significant influence at every stage of a CEO’s career. First, at the appointment stage, selection does not impede the promotion of behavioral managers. Instead, competitive environments oftentimes promote their advancement, even under value-maximizing selection mechanisms. Second, while at the helm of the company, learning opportunities are limited since many managerial decisions occur at low frequency, and their causal effect is clouded by self-attribution bias and difficult to disentangle from that of concurrent events. Third, at the dismissal stage, market discipline does not ensure the firing of biased decision-makers as board members themselves are subject to biases in their evaluation of CEOs. 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 or is restricted to low-ability agents. Instead, biases are significant elements of human decision-making at the highest levels of organizations. An important question for future research is how to limit, in each CEO career phase, the adverse effects of managerial biases—from refining selection mechanisms, designing and implementing corporate repairs, and reshaping corporate governance to accounting not only for incentive misalignments but also for biased decision-making.