Abstract:
This research is set within the context of behavioral finance and economics, with the goal of identifying a relationship between the deviations of expected versus actual costs and expected versus actual profit margins, and behavioral biases such as overconfidence (miscalibration and better-than-average effect), anchoring, and planning fallacy.
Project data and participant involvement were facilitated by a prominent consulting firm in the engineering and technology sector, which provided a unique dataset that allowed for the exclusion of rational explanations for cost and margin deviations. A survey was administered to 18 project managers (most of whom were involved in the provided projects) and 17 control group individuals using Qualtrics. The survey included scenarios and proxy questions designed to assess participants' level of risk aversion, planning fallacy, miscalibration, anchoring, and better-than-average perception. Statistical methods were employed to investigate the relationships between these biases and the deviations observed.
The analysis revealed a positive relation between miscalibration and cost deviation, indicating that higher miscalibration leads to costs being higher than expected. Conversely, a negative correlation was found between miscalibration and profit margins, suggesting that margins are lower than expected in the presence of miscalibration. Additionally, a positive relationship was identified between the degree of the better-than-average effect and project managers' self-assessments of their relational skills. Additionally, the case study data analysis revealed a relationship between the use of certain decision-making methods and their outcomes. For instance, compared to democratic processes, consensus-based (unanimity), decentralized, and cascading processes perform better.
The findings suggest that integrating principles of behavioral finance into capital budgeting and project management processes can enhance project management effectiveness. Moreover, they underscore the need for ongoing review of one's technical and relational competencies to prevent miscalibration. The study also highlights the importance of expanding these surveys to include more managers and additional project data to obtain more robust statistical samples. Theoretically, this research enriches the behavioral finance literature by providing empirical evidence on how behavioral biases impact business decision-making processes.
