Capital investment decisions with managerial overconfidence and regret aversion

  • Christopher Philipp Klauss

Student thesis: Doctoral ThesisPhD


This research investigated the potential effects of managerial overconfidence and regret aversion in a corporate capital investment context. Three fundamental decision problems are analysed: Project selection (accepting or rejecting a proposed investment), managerial effort, and project evaluation (continuing or abandoning a failing investment). Very little previous research has looked at the role of psychological biases in corporate finance decisions, and the joint analysis of the two studied biases within one model is also a fairly novel contribution. Solving by backward induction a theoretically derived model integrating these decisions as well as overconfidence and regret aversion, I outline the conditions under which a biased manager will make choices that are inefficient from a shareholder value perspective; however, the model also reveals that, in combination, the two psychological phenomena may off-set such that the optimal outcome can be obtained. I further demonstrate how my theoretical propositions can be supplemented with empirical data by means of a survey and two different experiments. The survey of UK managers with capital investment responsibility exposes the pervasiveness of overconfidence and regret aversion within the sample group. In addition, indications for potential associations between these biases and certain capital investment decision choices are found. To my knowledge, no such empirical study exists so far. To explore potential causal relationships between overconfidence and effort, overconfidence and project selection, as well as regret aversion and project evaluation choices, two experiments were designed and conducted. The experimental data provides tentative support for the model and indicates the potential value of largerscale future research. I close by discussing the implications of my results for corporate governance and suggesting avenues for future work in this area.
Date of Award1 May 2006
Original languageEnglish
Awarding Institution
  • University of Bath
SupervisorRichard Fairchild (Supervisor) & Peter Vass (Supervisor)

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