Modeling the Affectability of Managers' Decisions from Cognitive Biases Based on Accounting and Economic Variables: A System Dynamics Approach

This study aims to provide a dynamic model based on accounting and economic variables, considering the affectability of managers' decisions from cognitive biases. The neglected point in accounting studies is investigating the amplifying or alleviating effect of managers’ cognitive biases on the extent of affectability of companies from uncertainty in the business environment, which shows the necessity of this research.

System dynamics approach has been used to model and study the interaction between components based on the information of companies listed in the Tehran Stock Exchange in a period of 9 years from 2011 to 2019. For simulation horizon, 15 years from 2011 to 2026 have been considered.

The uncertainty caused by higher inflation reduces the overinvestment of managers, while the projection bias reduces this negative effect. Although rising inflation also increases the tendency of loss aversion managers to receive loan, the difference between such managers is that they consider external financing when the weighted average cost of capital due to reliance on internal financing has gone up. Another result of this study was that managers with overconfidence bias underestimate the cost of internal resources, and based on inherent risk aversion, they reduce the portion of external financing risk to use it as an investment.

The decision making model of managers is influenced by cognitive biases and these deviations shape the behavior of managers in the face of environmental and exogenousfactors. Managers limit their investments and capital expenditure policies due to the condition of the country's economic environment. However, due to behavioral biases affecting their economic decision-making pattern, the overall performance of companies weakened and in fact, these companies lose their opportunities to value making and wealth creation.