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BP's Failure to Debias: Underscoring the Importance of Behavioral Corporate Finance

Author

Listed:
  • Hersh Shefrin

    (Department of Finance, Leavey School of Business, Santa Clara University, Santa Clara, California, USA)

  • Enrico Maria Cervellati

    (Department of Management, University of Bologna, Italy;
    Faculty of Economics, Luiss Guido Carli, Rome, Italy)

Abstract

This paper provides a behavioral analysis of BP, whose capital budgeting decisions in the last decade have resulted in a series of high-profile accidents, including the worst environmental disaster in US history. This analysis uses BP as a vehicle to discuss the application of business processes and psychological pitfalls to analyze corporate culture. The paper identifies weaknesses and vulnerabilities in BP's culture, makes comparisons with the corporate financial practices at other firms, and offers suggestions about how BP can engage in debiasing. Notably, the paper also suggests that insufficient knowledge of behavioral decision making resulted in analysts, investors, and regulators attaching insufficient emphasis to the risks in BP's operations. The paper calls for more attention to the psychological aspects of corporate behavior by analysts, regulators, corporate managers, and academics.

Suggested Citation

  • Hersh Shefrin & Enrico Maria Cervellati, 2011. "BP's Failure to Debias: Underscoring the Importance of Behavioral Corporate Finance," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 127-168.
    • Handle: RePEc:wsi:qjfxxx:v:01:y:2011:i:01:n:s2010139211000043
    DOI: 10.1142/S2010139211000043
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    Cited by:

    1. Lorenz Graf-Vlachy, 2019. "Like student like manager? Using student subjects in managerial debiasing research," Review of Managerial Science, Springer, vol. 13(2), pages 347-376, April.

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