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

55 Pages Posted: 27 Feb 2011 Last revised: 26 Aug 2011

Hersh Shefrin

Santa Clara University - Leavey School of Business

Enrico Maria Cervellati

University of Bologna - Department of Management

Date Written: March 29, 2011

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 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.

Keywords: behavioral finance, debiasing, decision-making

JEL Classification: G00, G30

Suggested Citation

Shefrin, Hersh and Cervellati, Enrico Maria, BP's Failure to Debias: Underscoring the Importance of Behavioral Corporate Finance (March 29, 2011). SCU Leavey School of Business Research Paper No. 11-05. Available at SSRN: https://ssrn.com/abstract=1769213 or http://dx.doi.org/10.2139/ssrn.1769213

Hersh Shefrin (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)

Enrico Maria Cervellati

University of Bologna - Department of Management ( email )

Via Capo di Lucca, 34
Bologna, 40126
Italy
0039(0)512098103 (Phone)
0039(0)51246411 (Fax)

HOME PAGE: http://www.sa.unibo.it

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