Toward Behavioral Transaction Cost Economics by George Z. Peng

Author:George Z. Peng
Language: eng
Format: epub
ISBN: 9783030468781
Publisher: Springer International Publishing

4.11.2 ‘Cultural Overconfidence Bias’ (Over-Optimism) and ‘Cultural Discounting Bias’ (Over-Pessimism)

Another pair of biases are ‘cultural overconfidence bias’ and ‘cultural discounting bias’, which are based on perceived similarity between cultures and the consequential overly optimistic (pessimistic) perception of risks due to low (high) CD. These biases are very similar to the above-mentioned assimilation/contrast biases, but may be more customarily consistent with uncontrollable uncertainties according to ROT. While the potentially powerful influence of cultural values and norms on cognition and thus tendencies of managers to recognize, create and execute real options has been suggested (Chi et al. 2019), the potential biases arising from CD on ROT need to be more systematically integrated into ROT in a behavioral sense.

A widely known cognitive bias in the ROT literature is the time discounting bias, which suggests that individuals place a higher value on proximate events than more remote future events (Frederick et al. 2002). It is a temporal bias because ‘people are apparently unable to produce an accurate and unbiased evaluation of experiences that extend over time’ (Kahneman et al. 2004: 430). However, temporal remoteness is just one reason that makes evaluations difficult to make, and other factors that can generate ‘psychological remoteness’ will cause similar discounting bias (Trout 2007: 210). Considering the wide use of CD, a bias, which can be termed as ‘cultural discounting bias’, comes to our mind. We believe that this bias will be of particular relevance in the context of a behavioral ROT (see Chapter 5). For example, Miller and Shapira (2004) found that managers display a natural tendency to discount the values of their options relative to their expected pay-offs due to temporal remoteness. This tendency can naturally be extended the cultural dimension (Trout 2007: 210), and managers will display a tendency to discount their expected pay-offs in culturally remote locations.

When CD is low, however, ‘cultural discounting bias’ gradually lose its potency and ‘cultural overconfidence bias’ takes over. Existing literature suggest that, as a consequence of perceived cultural similarity, managers tend to expect that what works at home culture would also work in host counties, and as a result, cultural overconfidence may develop (Fenwick et al. 2003; O’Grady and Lane 1996). Cultural similarity can mask small, but important, differences (Zaheer et al. 2012), leading to biases. We leave further discussion on this topic to Chapter 5. Here, again, it should be noted that firms are subject to these two types of bias simultaneously along the gamut of CD, where cultural overconfidence bias dominates when CD is low and cultural discounting bias prevails when CD is high. The implications of this will be discussed in Chapter 7.

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