Ben-David, Itzhak, Graham, John R. and Harvey, Campbell R., Managerial Miscalibration (August 8, 2012). Charles A. Dice Center Working Paper No. 2010-12; Fisher College of Business Working Paper No. 2010-03-012; AFA 2007 Chicago Meetings Paper . Available at SSRN: http://ssrn.com/abstract=1640552 or http://dx.doi.org/10.2139/ssrn.1640552

Abstract:

"We test whether top financial executives are miscalibrated using a unique 10-year panel that includes over 13,300 probability distributions of expected stock market returns. We find that executives are severely miscalibrated, producing distributions that are too narrow: realized market returns are within the executives’ 80% confidence intervals only 36% of the time. We show that the lower bound of the forecast confidence interval is lower during times of high market uncertainty; however, ex-post miscalibration is worst during these episodes. We also find that executives who are miscalibrated about the stock market show similar miscalibration regarding their own firms’ prospects. Finally, firms with miscalibrated executives appear to follow more aggressive corporate policies: investing more and using more debt financing."

Keywords: Overconfidence, Behavioral Biases, Behavioral Corporate Finance

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Keywords: Behavioral Economics, Mental Accounting, Home Bias

Abstract:

"We test whether professional forecasters forecast rationally or behaviorally using a unique database, QSS Database, which is the monthly panel of forecasts on Japanese stock prices and bond yields. The estimation results show that (i) professional forecasts are behavioral, namely, significantly influenced by past forecasts, (ii) there exists a stock-bond dissonance: while forecasting behavior in the stock market seems to be herding, that in the bond market seems to be bold in the sense that their current forecasts tend to be negatively related to past forecasts, and (iii) the dissonance is due, at least partially, to the individual forecasters' behavior that is influenced by their own past forecasts rather than others. Even in the same country, forecasting behavior is quite different by market."

Keywords: Investing, Forecasts, Herding

Roy F. Baumeister, Todd F. Heatherton, Dianne M. Tice, When Ego Threats Lead to Self-Regulation Failure: Negative Consequences of High Self-Esteem, Journal of Personality and Social Psychology 1993, Vol. 64, No. 1,141-156

The tendency for people with high self-esteem to make inflated assessments and predictions about themselves carries the risk of making commitments that exceed capabilities, thus leading to failure. Ss chose their performance contingencies in a framework where larger rewards were linked to a greater risk of failure. In the absence of ego threat, Ss with high self-esteem showed superior self-regulation: They set appropriate goals and performed effectively. Ego threat, however, caused Ss with high self-esteem to set inappropriate, risky goals that were beyond their performance capabilities so they ended up with smaller rewards than Ss with low self-esteem. The results indicate the danger of letting egotistical illusions interfere with self-regulation processes.

Keywords: Investment, Psychology, Self-Esteem

Abstract:

"The literature on the evolution of impatience, focusing on one-person decision problems, finds that evolutionary forces favor the more patient individuals. This paper shows that in the context of a game, this is not necessarily the case. In particular, it offers a two- population example where evolutionary forces favor impatience in one group while favoring patience in the other. Moreover, not only evolution but also efficiency may prefer impatient individuals. In our example, it is efficient for one population to evolve impatience and for the other to develop patience. Yet, evolutionary forces move the wrong populations."

Keywords: Human Behavior, Patience, Impatience

Abstract:

"Our experiment reveals that envy and altruism strongly affect the utility of investment choices: about 70% of the subjects reveal envy, 10% reveal altruism, while 20% are indifferent. Envious subjects even prefer an inferior First degree Stochastic Dominance (FSD) investment choice, provided that their peer groups lose more. We develop bivariate utility-free Stochastic Dominance (SD) rules with envy and altruism. Surprisingly, some non-pathological altruism preferences (let alone envious preferences) induce a reduction in the univariate expected utility of all parties. However, with the additive preferences, we identify important cases where the bivariate and the univariate SD efficient sets coincide."

Keywords: Investment, Investment Choices, Altruism, Greed

Keywords: Altruism, Self-Interest

Ben Graham told a story 40 years ago that illustrates why investment professionals behave as they do: An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news. “You’re qualified for residence”, said St. Peter, “but, as you can see, the compound reserved for oil men is packed. There’s no way to squeeze you in.” After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, “Oil discovered in hell.” Immediately the gate to the compound opened and all of the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. “No,” he said, “I think I’ll go along with the rest of the boys. There might be some truth to that rumor after all.”