Literature Review Women on boards and in TMTS and firm performance86 ture the company are outlined in section 4 6 Sec tion 4 7 summarizes my findings and concludes 4 2 Literature Review 4 2 1 Irrational managers behavior in behavi oral corporate finance The construct of Homo Economicus or economic man is a central assumption in economics more precisely neo classical economic theory Human beings are understood as rational utility maximi zers Their actions are aimed at optimizing indi vidual well being under the existing circumstan ces whereas well being in this context is defined by the utility function that claims that utilities of possible outcomes are weighted by their probabi lities Rationality is attributed to the Homo Eco nomicus as he pursues clearly defined objectives having stable preferences and making rational choices striving to achieve the highest possible well being or utility given at minimal cost Ap plying the neo classical axiom to the firm the pri me aim must be maximizing cash flows at lowest possible cost based on rational economic actions Accordingly firm managers the agents as well as investors should behave rationally Beginning in the 1950s however experimental evidence from the field of cognitive psycholo gy toppled the theory of rational behavior Allais 1953 criticizes the idea that a rational man must behave according to the Bernoulli principle or the expected utility hypothesis He argues that de cisions under risk in reality are made under the influence of additional psychological factors Furthermore probabilities can be significantly in fluenced and changed by subjective expectations Social scientist Simon states that the concept of economic man was in need of fairly drastic revisi on Simon 1955 p 99 He attempts to consider additional important variables of a complex decisi on making situation in order to adequately define rational behavior in this specific situation The psychologists Kahneman and Tversky 1979 build on Allais findings and develop an alternative model to expected utility theory prospect theory They show that people make choices among risky prospects that violate the basic principles of utility theory The certainty effect e g says that people tend to overweight certain outcomes with lower expected utility relative to uncertain or risky out comes with higher expected utility equivalent to risk aversion However if the probability of win ning is minuscule most people choose the option that provides the larger possible gain Preferences among negative prospects mirror the preferences among positive prospects People prefer uncertain negative outcomes that is the risk of loss rather than certain negative outcomes meaning a sure loss This observed risk seeking behavior is named reflection effect Weinstein 1980 also from the field of psychology provides support for the exis tence of an optimistic bias regarding future life events People show a tendency to believe that the own prospects to experience positive events are better than the prospects of their peers Vice versa they tend to believe that they are less likely to experience negative events This assessment is further enhanced given high commitment and a controllable situation as they estimate their indi vidual skills and competencies to be better than average Corporate finance focuses on the interaction of managers and investors Its objective is to explain the financial contracts and the investment behavi or that result from this interaction Baker Ruback Wurgler 2004 Understanding both parties beliefs and preferences is a crucial prerequisite for the analysis of patterns Baker et al 2004 CEO optimism and overconfidence

Vorschau DIRK-Forschungsreihe Band 21 Workforce diversity and personal policies Seite 86
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