BEHAVIORAL FINANCE PERSPECTIVE ON MANAGERIAL DECISION MAKING UNDER RISK IN COMMERCIAL BANKS

Decision making is the most important and the most difficult task that managers perform. On the other side they are most of the time confronted with risk and uncertainty, especially in banking industry. Objective of this study is to examine how managers of commercial banks performs this task, by putting it in the perspective of the newest findings from Behavioral finance field. Behavioral finance is based on premise that decision makers behave less than fully rational. Due to their deeply rooted human nature managers are prone to make decisions based on subjective evaluation of available options, relative to certain reference point and to current state of wealth, and also according to their personal interests which may contradict banks', industry's and social welfare's. Specifically, this study explores role of heuristics, biases and intuition in decision making, through concise review of existing literature. Importance of the study is in a fact that commercial banks are simultaneously the most important industry for country's economic development and stability and the most submissive industry to the risk. Owing to systematic nature of risk generally in financial markets, any irregularity in one country's banking industry will eventually reflect on other countries and is able to make ground for crisis. Study will contribute to better understanding of managerial perception of risk and their behavior under risk, which is primarily useful for architects of banks' corporate governance and banks' regulative. As we will see, setting identical option in two different frames leads to different decisions, this opens up possibilities to construct an environment in such a manner that decision makers are naturally led to make decisions that are in the best interest of all stakeholders involved.