Risk and Decision Making By Finance Executives: A Survey Study

Abstract

Purpose - When finance managers face decisions, they do not always make clinical evaluations using rational methodology, but systematically depart from utility maximisation. This article addresses biases that are related to risk propensity, and categorises them under five headings: decision makers' characteristics and perception; reference levels; mental accounting and the assumption of mean reversion; the longshot bias or overconfidence; and the desire for immediate gratification. The research reported in the paper seeks to understand the mechanisms of these biases using a study of decision making by Australian finance executives in a setting that is representative of a typical business decision. Design/methodology/approach - This paper uses a case study that was designed to identify why decision makers facing choices will prefer a risky alternative. Data were collected using e-mail contact and an electronic survey. Respondents ( Findings - Just over half the executives proved willing to take a risk, and almost half the variance in their risk propensity was explained roughly equally by respondents': endowment, perception of risk's role in decisions, assessment of alternative choices, and expectation of the decision's outcome. Manipulation of the cases along four dimensions varied the decision's facts, but they proved only marginally significant to risk taking. Originality/value - The study provides a practical explanation of the risk taking behaviour of finance executives; confirms that context is more important to decisions than their content; and adds to the growing body of applied behavioural research in finance.