Santa Clara Magazine

A Brief Behavioral History

A Brief Behavioral History

By Hersh Shefrin

Photo by Joanne Lee

 

My first solo book, Beyond Greed and Fear, was published in 1999. I wrote it to explain how psychology, including imperfect self-control, influences investor behavior. Rather than writing in a highly academic, abstract way, I focused more on stories about real people to bring the psychological issues to life for readers. At the same time, my interactions with executives from Financial Executives International provided me with a window on how corporate managers make judgments and decisions at their companies. I was noticing the same psychological issues that impact investors also impact managers, such as vulnerability to excessive optimism, overconfidence, confirmation bias, and aversion to a sure loss. The result was my 2006 book Behavioral Corporate Finance.

From the outset, my work on self-control examined techniques people use to mitigate psychological vulnerabilities. My next book in 2008, Ending the Management Illusion, focused on how companies can mitigate vulnerability to value-destructive psychological phenomena. I used many companies as examples in that book, and singled out Ford for making a positive corporate cultural shift to address its psychological challenges. The book also singled out BP for maintaining its problematic corporate culture. Several years later, Ford became the most profitable automobile manufacturer in the world, while BP experienced the explosion of Deepwater Horizon—and a presidential commission report on the accident would later conclude that at its heart the main problem was BP’s culture, just as I had argued.

My recent book, Behavioral Risk Management, published in 2016, is the natural sequel, and argues that every major risk management disaster since the turn of the century stems from identifiable psychological issues. Examples include the nuclear meltdown at Fukushima Daiichi, the financial meltdown associated with the global financial crisis, and the World Health Organization’s mishandling of the most recent Ebola crisis.

Hersh Shefrin

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