Managerial optimism is behavioral finance's greatest achievement. It explains two prominent features of corporate financial behavior - over-investment and pecking order capital structure preferences - that otherwise require two different theories with mutually incompatible assumptions about...

Three reasons explain active equity manager underperformance. First, as is now better understood, the returns to passive index component firms often are asymmetrically distributed with a mean larger than than the median, implying that random portfolio selection from index firms is likely to...

A risk-averse manager's overconfidence makes him less conservative. As a result, it is cheaper for firms to motivate him to pursue valuable risky projects. When compensation endogenously adjusts to reflect outside opportunities, moderate levels of overconfidence lead firms to offer the manager...