Understanding Managers, Leaders & Investors

By Pritesh Yadav June 22, 2026 9 min read —

So far we've looked at how ordinary people decide. Now we turn to two groups who hold a lot of power over other people's money and lives: leaders (managers, executives, founders) and investors. You might expect these people to be the calmest, most rational decision-makers around. The opposite is often true. The very things that make someone powerful or rich — confidence, control, big stakes, public reputation — tend to bend their judgment in predictable ways. This chapter shows you those bends, so you can spot them in a boss, a CEO in the news, a fund manager, or your own choices when you have power or money on the line.

Key takeaway: Power and money don't make people more rational. They reliably make people more biased — more confident, more committed to past choices, less able to hear "you're wrong." The cure is never willpower. It's structure.

Part 1 — The Biases of Leaders

Let's start with the people in charge. Four forces distort how leaders decide: misaligned incentives, overconfidence, commitment to past choices, and the warping effect of power itself.

The principal-agent problem (why incentives get gamed)

Here is one of the most important ideas in all of business. A principal is the person who owns something (a company's shareholders, a store owner). An agent is the person hired to act on their behalf (a manager, an employee, a fund manager). The trouble is that the agent has different goals and better information than the principal. The agent will quietly optimize for their reward, not for what the owner actually wants. Economists call this the principal-agent problem.

Information asymmetry: One side knows more than the other. The manager knows whether the project is really on track; the owner only sees the report the manager chooses to send.
Moral hazard: When someone can take risks but doesn't bear the full cost of those risks, they take too many.
Goodhart's Law: "When a measure becomes a target, it stops being a good measure." The moment you reward a number, people start chasing the number instead of the real goal behind it.

Example: In 2016, Wells Fargo bank pushed an aggressive sales target it called "Eight is Great" — get every customer into eight products. Staff who couldn't sell that fast simply opened roughly 2 million fake accounts customers never asked for. About 5,300 people were fired, the bank paid over $3 billion in fines, the CEO lost his job, and regulators capped how big the bank could grow. The leaders measured "accounts opened." So that's exactly what they got — even when it was fraud. This is Goodhart's Law in real life.

Common mistake: believing that stronger incentives fix bad behavior. Often they make it worse. A big bonus tied to one narrow number gives people a powerful reason to game that number, even by cheating. Multiple balanced metrics, long-term equity that vests slowly, and clawback rules ("we can take the bonus back if it was fake") work better than one giant carrot.

CEO overconfidence and "empire-building"

The higher someone climbs, the more sure they tend to feel. Researchers Ulrike Malmendier and Geoffrey Tate studied CEOs and found that overconfident leaders systematically overpay for companies they buy and over-invest in their own firm. They believe their company is undervalued and that they personally can run any target better than its current owners.

The market sees through it. When an overconfident CEO announces an acquisition, the stock price reaction averages about -90 basis points (a 0.9% drop). For a non-overconfident CEO, it's only about -12 basis points. Investors are basically saying: "He's overpaying again." Think AOL buying Time Warner, or Quaker buying Snapple — famous, value-destroying deals driven partly by ego.

Escalation of commitment (throwing good money after bad)

Escalation of commitment means pouring more resources into a failing decision just to justify the resources you already spent. It's the leader's version of the sunk-cost fallacy. Abandoning the project would mean admitting the original call was wrong — and that hurts the ego, especially in public.

Analogy: The classic case is the Concorde, the supersonic jet. Britain and France kept funding it for years after it was clearly going to lose money, simply because they'd already invested so much. So this trap is sometimes nicknamed the "Concorde fallacy." It's like staying in a two-hour movie you hate because you "already paid for the ticket" — the ticket money is gone either way; the only real choice is whether to waste the next two hours too.

How power itself rewires the brain

Psychologist Dacher Keltner calls this the power paradox: the empathy and perspective-taking that help people gain power tend to fade once they have it. In one striking study, people primed to feel powerful were more likely to draw the letter "E" on their own forehead facing themselves (so it looked backward to everyone else) — a tiny sign that power makes you forget how things look from another person's point of view.

Power tends to make leaders take more action and more risk, take less advice, and pay less attention to information that disagrees with them. None of this is about being a bad person. It's a predictable cognitive shift.

Tip — how to lead against your own biases: Build dissent into the structure so you don't have to rely on willpower. Run a pre-mortem ("Imagine it's a year from now and this failed badly — why?"). Appoint a red team whose job is to attack the plan. Use kill-criteria set in advance ("if we don't hit X by date Y, we stop"). And separate the person who starts a project from the person who decides whether to continue it.

Part 2 — The Biases of Investors (Behavioral Finance)

Now to the money markets. Behavioral finance is the study of how real investors actually behave — emotionally and irrationally — rather than how textbook theory says a perfectly logical investor should behave. Markets are driven by two ancient emotions: fear and greed. Almost every investor mistake traces back to one master idea.

The master key: loss aversion

Loss aversion means that losing $100 hurts about twice as much as gaining $100 feels good. (Researchers Kahneman and Tversky measured the ratio at roughly 2x.) This single fact explains most investing errors below.

Disposition effect: Selling winners too soon and holding losers too long. Selling a winner "locks in" a feel-good win (pride). Selling a loser forces you to admit the loss and feel regret — so people hang on, hoping it climbs back to what they paid. Studying ~10,000 brokerage accounts, Terrance Odean found investors did exactly this — and the losers they kept went on to underperform the winners they dumped. Doubly painful: it's also tax-foolish.
Overtrading: Overconfident investors think they can beat the market, so they trade constantly — and pay it all away in fees, spreads, and taxes. Barber and Odean found the 20% most active traders earned about 11.4% while the market returned about 17.9%. In their famous "Boys Will Be Boys" study, men traded 45% more than women — and their overconfidence directly cost them returns.
Herding: Following the crowd. Greed and fear-of-missing-out drive prices up; fear and panic drive them down. Rising prices seem to "prove" the crowd is right, creating a feedback loop — a bubble. Then it pops into a panic.
Recency bias / the behavior gap: Treating the recent past as the future — buying after a rally, selling after a crash. Because of this, the average investor earns far less than the market itself. In 2024, the average equity investor made 16.54% while the S&P 500 returned 25.02% — an 848 basis-point gap earned by panicking out right before the rebound.

Example: History rhymes — Tulip mania (1637), the dot-com bubble (2000), the 2008 housing crash, the GameStop meme-stock frenzy (2021), and repeated crypto cycles all follow the same shape: greed-fueled boom, herd piles in at the top, fear-fueled crash, herd sells at the bottom. CNN even publishes a Fear & Greed Index (0 to 100) that tries to measure where the mood currently sits.

Analogy: The market is like a crowded theater. When someone shouts "fire!" (a crash), everyone rushes the exit at once and gets crushed in the doorway — selling at the worst possible moment. The disciplined investor is the one who checked beforehand that the building wasn't actually on fire, and quietly stays seated.

Common mistakes investors make: using your purchase price as the reference for whether to sell (the market doesn't care what you paid); checking your portfolio daily, which maximizes the pain of loss aversion; confusing a bull market with personal genius (self-attribution: "I'm skilled" on the way up, "bad luck" on the way down); and believing that knowing these biases protects you — it barely does.

Best practices — how to invest against your own brain: The fixes are all structural, because emotion overpowers willpower in the moment.

Automate contributions and use dollar-cost averaging (invest a fixed amount on a schedule) so emotion never makes the call.
Rebalance on a calendar — it mechanically forces you to buy low and sell high.
Treat inactivity as intelligence. Warren Buffett's "20-punch-card" idea: imagine you only get 20 trades in your whole life, so each one must count. Fewer decisions, fewer mistakes.
Write an investment policy statement in calm times and follow it in panicked ones. As Buffett puts it: "Be greedy when others are fearful, and fearful when others are greedy."
Remember: "Time in the market beats timing the market."

Putting it together: the same pattern, two arenas

Notice how leaders and investors fall into mirror-image traps:

Underlying force	In a leader	In an investor
Overconfidence	Overpaying for acquisitions, empire-building	Overtrading, "I can beat the market"
Loss aversion / ego	Escalation of commitment to failing projects	Disposition effect — riding losers down
Gamed incentives	Wells Fargo fake accounts	Chasing whatever rallied recently
Following others	Yes-men, no dissent in the room	Herding into bubbles and panics

In both arenas the remedy is the same shape: don't trust your gut to police itself. Use independent boards, red teams, pre-mortems, kill-criteria, written rules, automation, and people whose job is to tell you "no." Power and money are like a magnifying glass held over your judgment — they enlarge whatever bias is already there. The leaders and investors who endure are the ones humble enough to build guardrails before they need them.

Final key takeaway: The most dangerous decision-maker is a confident, powerful, or wealthy one who believes they're immune to bias. Assume you're biased by default, especially when you have the most authority or the most money at stake — and replace willpower with structure: outside views, pre-set rules, and people empowered to disagree.

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