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Title: Illusion of Control bij investeringen in projectontwikkeling Verkennend onderzoek naar de invloed van het gedragsaspect illusion of control op de investeringen van ondernemingen actief in projectontwikkeling.
Authors: Weel, ter
Keywords: Keywords: Illusion of Control, capital budgeting, property development.
Issue Date: 17-Feb-2015
Publisher: Open Universiteit Nederland
Abstract: Illusion of Control in situations of capital budgeting in property development Exploratory research to the influence of the behavioral aspect illusion of control on investments of companies active in property development. Keywords: Illusion of Control, capital budgeting, property development. Behavioral Finance is the study of how psychology affects (traditional) finance. It seeks explanations for non-rationality that may affect economic decisions and identifies psychological pitfalls. A common problem in capital budgeting decisions is Illusion of Control (IoC). IoC makes people believe that their chances of success are greater than can be justified by objective analysis. The results are overly optimistic expectations about their impact on the outcomes and controllability of the relevant processes. Property development can be seen as a risky venture with use of capital and labor for a longer period. Decisions often takes place in phases and adjustments during the lifetime of an investment seems possible. However, many conditions are difficult or practically impossible to influence. IoC in property development seems to focus particularly on the expectations of managers to exert their influence and control. The central question of this study is: how does the behavioral aspect illusion of control influence investments of companies active in property development? In support of answering this research question, a set of sub-questions has been made. These questions are part of the conceptual framework around IoC, the emergence of IoC, the effects of it on capital budgeting and the relevance regarding property development. To find out the answers to the questions, a literature review has been prepared that results in a theoretical framework or conceptual model, which outlines the relevant causes, manifestations and consequences of IoC. The conceptual model is tested empirically. The goal of the empirical study is to explore the phenomenon of IoC and to discover the assumed patterns and relationships. The study is a inductive empirical approach whereby theory can be developed based on patterns observed in the empirical data. The research method is a multiple case study preceded by a limited quantitative research. Managers often rely on experience, intuition and routine (cognitive bias). The results of this study suggest that cognitive bias often leads to IoC. Additionally, when managers do have a perceptible sense of control by using their skills, it will lead to the illusion to control investment processes. This illusion of control can lead to unrealistic optimism. The higher the perception of control is, the more likely it is to underestimate risks and overestimate opportunities. This can lead to negative consequences for investment decisions, such as making too auspicious assessments, insufficient research, neglecting external factors and taking inadequate risk protection measures. This research is qualitative in nature and structure. Almost certainly there is subjectivity in assessing results. In the qualitative study various associations around the concept of IoC are explored and compared to a previously established conceptual model. Investments in property development are characterized by complexity, a long-term nature and a high degree of uncertainty. Managers often look for possibilities using their skills optimally and thus control the investment process. IoC takes place in particular in the expectations of managers to exert their influence in the adjustment of investment processes. In practice IoC can be countered by organizations to prioritize objective analyses of investment choices and to rely less on intuition and experience
Appears in Collections:MSc Management Science

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