Deconstructing the Normative-Descriptive Gap in Financing Decisions: A Hybrid SEM-AHP Analysis of Managerial Biases in an Emerging Market
This study employs a hybrid SEM-AHP framework to analyze financing decisions among Iranian industrial managers, revealing that anchoring and regret aversion—not overconfidence—are the dominant biases driving a significant divergence between normative capital structure benchmarks and actual practices in volatile emerging markets.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Imagine you are the captain of a ship. In the perfect world of a math textbook, you would always choose the fastest, most fuel-efficient route to your destination, calculating every variable with cold, hard logic. This is how classical finance theory thinks companies should make money decisions: they should pick the cheapest way to get funds, just like a captain picks the best wind. But in the real world, captains are human. They get scared, they get stuck on old maps, and they sometimes make choices that feel safe even if they aren't the fastest. This gap between what should happen (the textbook plan) and what actually happens (the human choice) is called the "normative-descriptive gap." Scientists who study this are like detectives trying to figure out why humans ignore the math. They suspect that our brains have "glitches"—like being too sure of ourselves or being terrified of making a mistake—that steer us off course. Understanding this is crucial because if we don't know why managers make weird choices, we can't fix the economy or help companies grow.
Now, picture a group of researchers in Iran who decided to investigate this mystery. They wanted to see if the famous "glitch" of Overconfidence—the idea that bosses think they are super-geniuses and can do no wrong—was actually the main reason companies pick bad financing plans. To do this, they used a clever two-part detective kit. First, they asked 56 managers in the Shiraz Industrial Estate about their feelings and habits to see what was actually driving their choices (this is the "Descriptive" part). Second, they asked a panel of experts to build a "perfect" list of how financing should be chosen based on pure logic (this is the "Normative" part). By comparing the managers' messy, human reality against the experts' clean, logical list, they could measure exactly how far off the managers were.
Here is the twist: the researchers found that the "Overconfidence" glitch was basically non-existent in this group. It showed up in only 5.36% of the managers. Instead, the real villains were Anchoring and Regret Aversion. Anchoring is like being glued to a specific number or memory; these managers were 55.36% likely to stick to the first price they saw or a past experience, even if the market had changed. Regret Aversion was right behind at 53.57%, meaning these managers were so terrified of making a choice they would later feel bad about, they played it super safe.
When the researchers looked at the "Perfect List" created by the experts, the top choices were Bank Loans and Internal Investment (using the company's own saved money). These were the logical, efficient picks. But when they looked at what the managers actually did, the story was totally different. The managers were avoiding Bank Loans and Internal Investment. Instead, they were overusing Asset Divestiture (selling off parts of the company, like furniture or equipment) because it felt like a "safe" way to get cash without asking for help. They also completely avoided Equity Issuance (selling shares to the public) because the fear of losing control or making a public mistake was too high.
The study suggests that in a volatile, uncertain economy, managers don't act like arrogant geniuses; they act like cautious survivors. They aren't trying to build empires; they are trying to avoid the pain of regret. The researchers calculated that these psychological fears explained 22% of why managers made the choices they did. They call this new pattern the "Hierarchy of Fear and Anchoring." It's a ladder where managers climb down from the most efficient financial options to the most psychologically comfortable ones. They would rather sell a piece of their company (Asset Divestiture) than risk the judgment of the public market (Equity), even if selling that piece is a worse deal for the company in the long run.
The authors are careful to say this isn't a magic bullet that solves all financial problems. They measured this in one specific group of 56 managers in one industrial area, so it might look different in other countries or in calmer economies. However, their findings strongly suggest that in high-stress environments, the "fear of regret" is a much bigger driver of financial decisions than the "ego of overconfidence." They propose that to fix these gaps, companies might need to stop treating managers like robots who just need better math skills, and start helping them recognize when their fear is making them choose the wrong path.
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