Managerial Overconfidence

Abstract

This chapter presents an overview of the overconfidence construct. Stemming from the behavioral finance literature, the overview discusses overconfidence as a result of several cognitive biases. In particular, there is a detailed discussion on the self-serving bias, the valence effect, the wishful thinking bias, and the anchoring effect. These biases have a detrimental effect in business and financial decisions. The chapter then presents the Big Five Model, as a model of interpretation for human personality. This model encompasses extroversion, friendliness, conscientiousness, emotional stability, and open-mindedness. All these elements are salient when determining overconfidence. After a discussion on the implications of an overconfident attitude in the stock market, there is a clear discussion on the behavior of the overconfident manager. The chapter concludes with the impact of overconfidence for small and medium enterprises. The ideas developed here are a base for the in-depth contextual analysis of the subsequent chapters.