You have just been retained as a strategic consultant to help a 100-year-old fir

Question

You have just been retained as a strategic consultant to help a 100-year-old firm evaluate its capital budget decision making. Your first look at the firm’s prior decision making appears to indicate that management has oftentimes used an approach fraught with repeated biases and heuristics. Your task is to present an introductory session that highlights the inherent risks of adding psychology to finance (i.e., behavioral finance). Outline five common biases or heuristics that may negatively impact profit maximizing capital budgeting decision making and give an example of how each one may lead to a suboptimal decision.

Explanation / Answer

Risks of adding psychology to finance:

Capital budgeting decision making:

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