How to Make Better Decisions? Lessons Learned from Behavioral Corporate Finance

This article reviews the literature in the field of Behavioral Corporate Finance. For reasons of simplicity, we distinguish between two approaches. The first approach focuses on the analysis of irrational behavior of managers in the context of efficient financial markets. Many empirical studies discover systematic irrational managerial behavior. The second approach regards rational manager decisions in the context of inefficient markets. The analysis focuses on situations where investors are systematically irrational taking rational and well-informed managers as given. Interestingly, Behavioral Corporate Finance is able to explain many empirical observations that cannot be explained by traditional Corporate Finance. In reality, both managers and investors act to some extent irrationally. Therefore, we make recommendations to both groups in order to improve their decision making. In contrast to other papers, we give specific recommendations for both managers and investors. With the help of these recommendations, managers and investors are able to improve decision-making to their mutual advantage.