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Behavioral Biases and Corporate Decision Making on Investing Abroad

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  • Kotov, Denis

Abstract

In this paper we have studied the role of biases in making corporate decisions on investing abroad. We have formulated four conditions under which a corporate investment decision is least exposed to the influence of heuristics. Failing to comply with some conditions of a precise investment performance leads to a situation of a high uncertainty and complexity that demands an intuitive thinking from a decision maker and, as a result, stimulates using the rules of thumb. Further, we have discussed possible measures for the mitigation of the negative influence of heuristics. For an indicative estimation of a degree of biases an ex-ante/ex-post risk perception matrix has been proposed. The study is supported by the results of a survey made in 2008 and structured interviews taken in the spring and the summer of 2013. The survey was carried on among German firms doing business in Russia. Interviews covered not only investments to Russia, but also investments of Russian investors in Europe as well as transatlantic foreign direct investments made in the last three years.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49858.

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Date of creation: Sep 2013
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Handle: RePEc:pra:mprapa:49858

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Keywords: biases; heuristics; investment decisions; foreign direct investments; decision-making process;

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  1. Pinheiro-Alves, Ricardo, 2008. "Behavioural determinants of Foreign Direct Investment," MPRA Paper 10297, University Library of Munich, Germany.
  2. Ulrike Malmendier & Geoffrey Tate, 2005. "Does Overconfidence Affect Corporate Investment? CEO Overconfidence Measures Revisited," European Financial Management, European Financial Management Association, vol. 11(5), pages 649-659.
  3. Kotov, Denis, 2009. "How Decisions on Investing in Russia are made by German Firms?," MPRA Paper 16373, University Library of Munich, Germany.
  4. Hackbarth, Dirk, 2009. "Determinants of corporate borrowing: A behavioral perspective," Journal of Corporate Finance, Elsevier, vol. 15(4), pages 389-411, September.
  5. Itzhak Ben-David & John R. Graham & Campbell R. Harvey, 2007. "Managerial Overconfidence and Corporate Policies," NBER Working Papers 13711, National Bureau of Economic Research, Inc.
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