Cognitive Biases in the Capital Investment Context (eBook)

Dr. Sebastian Serfas completed his doctoral thesis under the supervision of Prof Dr. Uwe Götze at Chemnitz University of Technology. He conducts research at the intersection of psychology and business administration and works for a leading management consultancy.

Table of Contents 8
1 Introduction 15
1.1 Origin and Academic Relevance of the Research Focus 15
1.2 Structure of the Thesis 18
2 Theoretical Foundations of Capital Investments and Investment Appraisal 21
2.1 Fundamentals of Capital Investments 21
2.1.1 Definition of Investments in General 22
2.1.2 Classifications and Characteristics 24
2.1.3 Phases of Capital Investments 27
2.2 Fundamentals of Decision Theory and Decision Models 29
2.2.1 Introduction to Decision Theory 30
2.2.2 The Basic Concept of Rationality 31
2.2.3 Decision Models 35
2.3 Investment Appraisal 38
2.3.1 Investment Appraisal Process 39
2.3.2 Fundamental Static Methods 41
2.3.3 Fundamental Dynamic Methods 45
2.3.4 Advanced Methods 49
3 Theoretical Foundations of Cognitive Biases 53
3.1 Fundamentals of Cognitive Psychology 53
3.1.1 General Psychology and its Sub-Disciplines 54
3.1.2 Introduction to Cognitive Psychology 56
3.1.3 Subjects and Approaches of Cognitive Psychology 59
3.2 Heuristics and Biases 61
3.2.1 Introduction to the 'Heuristics and Biases' Approach 61
3.2.2 Fundamental Heuristics and their Resulting Cognitive Biases 66
3.2.2.1 Availability Heuristic 67
3.2.2.2 Representativeness Heuristic 74
3.2.2.3 Anchoring and Adjustment Heuristic 81
3.3 Selection of Further Biases and Effects 84
3.3.1 Framing Effects 85
3.3.2 Irrational Relativity 89
3.3.3 Action and Inaction Preferences 93
3.3.4 Overconfidence Effects 97
3.4 Critical Discussion of the 'Heuristics and Biases' Approach 101
3.4.1 Critiques Regarding the General Orientation and Focus 101
3.4.2 Critiques Regarding the Scientific Adequacy 103
3.4.3 Critiques Regarding the Content and Research Set-Up 106
4 Cognitive Biases in the Capital Investment Context 109
4.1 Preparatory Theoretical Considerations 109
4.1.1 Cognitive Biases in the General Business Context 109
4.1.2 Cognitive Biases in the Financial Investments Context: Behavioral Finance 112
4.1.3 Cognitive Biases in the Capital Investments Context 116
4.2 Illustrative Case Examples 121
4.2.1 Identification and Evaluation of Risks for a Capital Investment Project 121
4.2.2 Preparation and Analysis of a Business Case for a Capital Investment Opportunity 126
4.3 Empirical Experiments 131
4.3.1 Overview and General Approach 131
4.3.2 Empirical Experiments: Anchoring 141
4.3.2.1 Underlying Theory 142
4.3.2.2 Methodology and Preparation of Empirical Experiments 144
4.3.2.3 Analysis and Conclusions 148
4.3.3 Empirical Experiments: Framing 159
4.3.3.1 Underlying Theory 159
4.3.3.2 Methodology and Preparation of Empirical Experiments 161
4.3.3.3 Analysis and Conclusions 165
4.3.4 Empirical Experiments: Asymmetric Dominance 173
4.3.4.1 Underlying Theory 173
4.3.4.2 Methodology and Preparation of Empirical Experiments 176
4.3.4.3 Analysis and Conclusions 182
4.4 Critical Discussion of Conclusions and Limitations 190
4.4.1 Preliminary Conclusions 191
4.4.2 Limitations inherent in the General Approach and Methodological Set-Up 192
4.4.3 Limitations inherent in the Incongruity between Participant Population and Relevant Real Life Population 197
4.4.4 Replication Study with Professionally Experienced Participants 199
5 Debiasing and Potential Countermeasures against Cognitive Biases 204
5.1 Robustness of Cognitive Biases 204
5.2 Debiasing Techniques 206
5.2.1 Definition of Debiasing in General 207
5.2.2 Knowledge, Experience, and Expertise 208
5.2.3 Incentives and Accountability 210
5.2.4 Training and Tools 212
5.3 Counterstrategies 216
6 Conclusion 223
6.1 Overall Summary 223
6.2 Areas for Future Research 228
Appendices 232
Appendix I: Introductory description of the situation583 233
Appendix II: Anchoring experiment 1584 234
Appendix III: Anchoring experiment 2585 235
Appendix IV: Anchoring experiment 3586 236
Appendix V: Anchoring experiment 4587 237
Appendix VI: Task framing experiment 1588 238
Appendix VII: Task framing experiment 2589 239
Appendix VIII: Asymmetric dominance experiment 1590 240
Appendix IX: Asymmetric dominance experiment 2591 241
Appendix X: Demographic information collection592 242
References 243