Story in the School of Business
Finance professor studies how the business of behavior plays a part in financial mishaps.
Businesses are run by people who have their own personality quirks and a capacity for self-delusion. Yet the way this fact affects business decisions has been largely ignored or downplayed over the years by most business schools.
Hersh Shefrin, the Mario L. Belotti Professor at SCU's Leavey School of Business, is a pioneer in the area of behavioral finance, a field that examines how the human factor plays out in the business world. In a new book, Ending the Management Illusion, he describes how companies can avoid bad decisions by making structural changes to take personality into account.
"I've tried to take a look at the classic financial mistakes which people make, both as individuals and in groups, and relate these to corporate cultures and process—particularly when it comes to a bias toward overconfidence and optimism," Shefrin says. "This book is not going to solve all those problems, but it can be the beginning of a conversation."
Too often, managers plan only for the best-case situation and don't rigorously identify the things that can go wrong, and what the best response would be if they do. They tend to suffer from what Shefrin calls "the illusion of control," making them overconfident about outcome and reluctant to plan for possible setbacks.
"The book is not about ending management," Shefrin says. "It's about improving management through the use of better financial and accounting processes built into the culture of the organization."