Behavioural corporate decision making

In the previous part, I examined the neoclassical model of the firm, in which the firm is seen as a black box that takes in inputs and produces output. A central decision-maker makes decisions to maximise the firm’s value. An employee makes decisions to maximise their utility.

Although a powerful analytical tool, the classical approach to firms is a simplification. It does not always align with the empirical evidence of how firms and employees behave.

In this part, I sample some of the departures from the classical model. I examine how corporate decision making can fail and what features of human decision making can drive this failure, including:

• Empirical evidence on incentives in the workplace
• How overconfidence can influence firm decisions
• The use of heuristics in corporate decision making
• Errors in corporate decisions, including use of hindsight, short-cuts in assessing firm performance and exclusion of useful information
• How bias may affect recruitment in firms.