The Behavioural Finance Revolution: Bridging the Gap between Numbers and Corporate Performance

Abstract

This conceptual paper investigates the interplay between cognitive biases, financial decision-making, and corporate governance within the framework of behavioral finance. By examining a range of cognitive biases, including overconfidence bias, confirmation bias, anchoring bias, disclosure bias, and framing bias, the paper explores the complexities of human behavior and its impact on financial outcomes, especially in developing countries. The paper aims to suggest an approach for researchers by proposing an overall framework that intricately connects the subjectivity of cognitive biases with empirical research. The integration of theoretical frameworks, such as prospect theory, bounded rationality theory, agency theory, framing theory, availability heuristic, and the endowment effect, provides a comprehensive understanding of deviations from rational expectations in financial decision-making. Furthermore, the paper highlights the relevance of cognitive biases in understanding corporate scandals and their implications for shareholder value creation and long-term sustainable growth. The findings contribute to both academic research and practical implications, offering insights for practitioners, policymakers, and researchers in their endeavors to enhance transparency, improve decision-making processes, and cultivate responsible corporate behavior within organizations.