Behavioral models of managerial decision-making
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Behavioral models of managerial decision-making Avi Goldfarb & Teck-Hua Ho & Wilfred Amaldoss & Alexander L. Brown & Yan Chen & Tony Haitao Cui & Alberto Galasso & Tanjim Hossain & Ming Hsu & Noah Lim & Mo Xiao & Botao Yang
Published online: 18 May 2012 # Springer Science+Business Media, LLC 2012
Abstract This paper reviews the literature that applies behavioral economic models to managerial decisions. It organizes the literature into research that focuses on alternative utility functions and research that focuses on non-equilibrium models. Generally, behavioral models have seen less application to manager decisions than to consumer decisions and therefore there are many opportunities to develop new theoretical models, new laboratory experiments, and new field applications. The application of these models to field data is particularly underdeveloped.
A. Goldfarb (*) : A. Galasso : T. Hossain Rotman School of Management, University of Toronto, Toronto, ON, Canada e-mail: [email protected] T.-H. Ho : M. Hsu Haas School of Business, University of California, Berkeley, CA, USA W. Amaldoss Fuqua School of Business, Duke University, Durham, NC, USA A. L. Brown Department of Economics, Texas A&M University, College Station, TX, USA Y. Chen School of Information, University of Michigan, Ann Arbor, MI, USA T. H. Cui Carlson School of Management, University of Minnesota, Minneapolis, MN, USA N. Lim Wisconsin School of Business, University of Wisconsin-Madison, Madison, WI, USA M. Xiao Eller College of Management, University of Arizona, Tucson, AZ, USA B. Yang Marshall School of Business, University of Southern California, Los Angeles, CA, USA
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Mark Lett (2012) 23:405–421
Keywords Behavioral economics . Managerial decision-making
1 Introduction How do managers make choices? The dominant paradigm in empirical and theory work in economics is to assume that manager choices are made by fully rational decisionmakers. These models often assume managers seek to maximize the present value of current and future earnings, solve a dynamic optimization problem, and play a Bayesian Nash Equilibrium. An increasing amount of research, however, has documented that these (and other) standard assumptions are often violated. In their place, several formal models of alternative assumptions have been developed and tested. The general literature on bounded rationality and alternative utility functions has been reviewed by Ho et al. (2006) and DellaVigna (2009). It highlights a growing body of work that has emphasized consumer analysis inside and outside the lab. For management implications, this literature has emphasized how rational firms can exploit the bounded rationality of consumers. For example, DellaVigna and Malmendier (2006) design optimal contracts in the presence of time-inconsistent consumer preferences, and Grubb (2009) discusses exploiting consumer overconfidence. When relevant, we briefly highlight papers on consumer biases that are closely related to the discussion. In discussing the literature on consumer biase
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