Cognitive Biases and Firm Performance among Entrepreneurs in Bangladesh SMEs: Unwrapping the Mediating Role of Strategic Decision Making

Tania Afroze; Md. Abdur Rashid Sarker

doi:10.53808/KUS.2025.22.01.1296-mb

Authors

Tania Afroze Business Administration Discipline, Khulna University, Khulna-9208, Bangladesh
Md. Abdur Rashid Sarker Department of Economics, University of Rajshahi, Rajshahi-6205, Bangladesh

DOI:

https://doi.org/10.53808/KUS.2025.22.01.1296-mb

Keywords:

Overoptimism, Overconfidence, Illusion of control, Strategic decision-making, Entrepreneurs, SEM

Abstract

This study investigates how strategic decision-making functions as a mediator in the relationship between cognitive biases and firm performance among Bangladeshi entrepreneurs. We use data from 354 SME (Small and Medium Enterprise) entrepreneurs located in four major cities: Dhaka, Rajshahi, Khulna, and Jashore to investigate both direct and mediated effects using Partial Least Squares Structural Equation Modeling (PLS-SEM). A structured questionnaire with five-point Likert scale statements was administered through face-to-face interviews with SME owners to assess cognitive biases, strategic decision-making processes, and firm performance. The results indicate that overconfidence and the illusion of control adversely influence strategic decision-making, and strategic decision-making positively impacts firm performance. However, no significant relationship was found between overoptimism and strategic decision-making. The mediating effect of strategic decision-making on overconfidence and firm performance is significant, whereas the mediation effect of strategic decision-making on overoptimism and firm performance, as well as on the illusion of control and firm performance, is insignificant. These findings highlight the complex role of cognitive biases in shaping entrepreneurial decision-making and business outcomes. By integrating strategic decision-making as a mediating variable, this study enhances the understanding of how cognitive biases affect SMEs within Bangladesh, an emerging market economy. Additionally, it extends the application of Upper Echelons Theory by demonstrating the influence of cognitive biases on strategic choices and firm performance. The insights from this study provide valuable implications for entrepreneurs, policymakers, and business advisors seeking to lessen biases and improve decision-making effectiveness in the SME sector.

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