The main objective of this chapter is for students to demonstrate that they can identify 10 psychological phenomena that cause corporate managers to commit expensive mistakes when making decisions. These phenomena are divided into two groups. The first group is called heuristics and biases, and the second group is called framing effects.

After completing this chapter students will be able to:

1. Identify the key biases that lead managers to make faulty financial decisions about risky alternatives.
2. Explain why reliance on heuristics and susceptibility to framing effects render managers vulnerable to making faulty decisions that reduce firm value.
3. Recognize that investors are susceptible to the same biases as managers and that mispricing stemming from investor errors can cause managers to make faulty decisions that reduce firm value.