We examine whether managerial overconfidence can help explain the observed discrepancies between the theory and practice of corporate risk management. We use a unique dataset of corporate derivatives positions that enables us to directly observe managerial reactions to their (speculative) gains and losses from market timing when they use derivatives. We find that managers increase their speculative activities using derivatives following speculative cash flow gains, while they do not reduce their speculative activities following speculative losses. This asymmetric response is consistent with the selective self-attribution associated with overconfidence. Our time series approach to measuring overconfidence complements cross-sectional approaches currently used in the literature. Our results show that managerial overconfidence, which has been found to influence a number of corporate decisions, also affects corporate risk management decisions.

We use the financial crisis of 2007–2009 as a laboratory to examine the costs and benefits of teams versus single managers in asset management. We find that when a fund uses complex trading strategies involving the use of CDS team-managed funds outperform solo-managed funds. This may be due to the greater diversity of expertise, experience and skill of teams relative to single managers. During the financial crisis, however, the performance premium of teams becomes negative, which may be because of the slower decision times of teams, which are especially costly during times of rapidly changing market conditions.