BP's Failure to Debias: Underscoring the Importance of Behavioral Corporate Finance
Santa Clara University - Leavey School of Business; National Bureau of Economic Research (NBER)
Enrico Maria Cervellati
University of Bologna - Department of Management
March 29, 2011
SCU Leavey School of Business Research Paper No. 11-05
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 U.S. history. The 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.
Number of Pages in PDF File: 55
Keywords: behavioral finance, debiasing, decision-making
JEL Classification: G00, G30working papers series
Date posted: February 27, 2011 ; Last revised: August 26, 2011
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