Paper Summary
Paper Summary In “BP’s Failure to Debias: Underscoring the Importance of Behavioral Corporate Finance”, Shefrin argues that the explosion of Deepwater Horizon is not an accident for BP; overconfidence, excessive optimism and other weaknesses in BP’s culture will make this crisis happen sooner or later. Therefore, psychological pitfalls are the root cause of this BP crisis. Moreover, he suggests that cognitive repairs should be added into firm’s decision processes to improve corporate culture, then it will help firms mitigate psychological pitfalls. According to Shefrin, it is necessary to integrate behavioral elements into corporate finance to analyze the firms’ decision.
I could not agree more with Shefrin’s ideas. Firstly, firms should take more social responsibility besides maximizing shareholders’ value. Through the analysis of the case of BP, BP didn’t pay enough attention to the safety issues and didn’t do good maintenance practices during production, because BP would like to lower the production costs and keep its profits. To analyze BP’s decision from the view of psychological pitfalls, we find that corporate culture and psychological elements play key roles in the firm’s decision making. Overconfidence, excessive optimism and other weaknesses in BP’s culture make the explosion of Deepwater Horizon happen. Although shareholders’ value is very important for firms, firms should pay more attention to their social responsibility. No doubt, there is cost for corporate social responsibility, but safety and green environment can not be measured by money. Another example, a California court claimed that the accident due to GM's automotive fuel tank position caused by poorly designed is the responsibility of GM and GM had to make a compensation $4.8 billion in penalties on July 9, 1999. Survey showed that GM already knew there was a defect in fuel tank position during the 1979-1983 production, but the costs of changing design is
I could not agree more with Shefrin’s ideas. Firstly, firms should take more social responsibility besides maximizing shareholders’ value. Through the analysis of the case of BP, BP didn’t pay enough attention to the safety issues and didn’t do good maintenance practices during production, because BP would like to lower the production costs and keep its profits. To analyze BP’s decision from the view of psychological pitfalls, we find that corporate culture and psychological elements play key roles in the firm’s decision making. Overconfidence, excessive optimism and other weaknesses in BP’s culture make the explosion of Deepwater Horizon happen. Although shareholders’ value is very important for firms, firms should pay more attention to their social responsibility. No doubt, there is cost for corporate social responsibility, but safety and green environment can not be measured by money. Another example, a California court claimed that the accident due to GM's automotive fuel tank position caused by poorly designed is the responsibility of GM and GM had to make a compensation $4.8 billion in penalties on July 9, 1999. Survey showed that GM already knew there was a defect in fuel tank position during the 1979-1983 production, but the costs of changing design is