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Estimating the Probability of Meeting Financial Commitments: A Behavioral Finance Perspective Based on Business Simulations
Author(s) -
Conine Thomas E.
Publication year - 2013
Publication title -
global business and organizational excellence
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 16
eISSN - 1932-2062
pISSN - 1932-2054
DOI - 10.1002/joe.21529
Subject(s) - overconfidence effect , perspective (graphical) , divergence (linguistics) , corporation , process (computing) , task (project management) , finance , behavioral economics , estimation , risk management , actuarial science , business , risk analysis (engineering) , marketing , computer science , economics , psychology , management , social psychology , artificial intelligence , linguistics , philosophy , operating system
In an enterprise risk management environment, managers regularly can expect to be called upon to assess the probability that they will meet financial commitments. The ability to do so makes planning easier and enables the prudent risk taking that is crucial to driving growth. But even highly experienced managers are prone to overconfidence—one of the well‐known behavioral biases that can negatively affect their ability to form an accurate assessment. Estimating probability is, in fact, no simple task, and careers have been made and lost over met or missed commitments. Over the decades, a central theme of TRI Corporation's business simulations has been the issue of meeting commitments and managing risk. Now, a study of these simulations has shed light on the challenges inherent in the estimation process. Among the findings: Greater divergence in opinion among team members early in the estimating process can result in more accurate assessments, while divergence later in the process can weaken the team environment and lead to an inability to deliver on commitments. © 2014 Wiley Periodicals, Inc