Hersh Shefrin, Santa Clara University ISBN: Preface Goals and Structure The second edition of Behavioral Corporate Finance comes a decade after the publication of the first edition, which was the first textbook dedicated to providing instructors with a comprehensive pedagogical approach for teaching students how behavioral concepts apply to corporate finance. This second edition contains a great deal of new material, as the academic literature in behavioral corporate finance a decade ago was nascent. Notably, in the last 10 years this literature has mush-roomed, and so the second edition has much upon which to draw. Feedback from adopters of the first edition provides testimony to the fact that the examples and cases in the first edition are unique in bringing behavioral corporate finance alive. This is especially true of the minicases that conclude each chapter of the first edition. The second edition contains a completely new set of minicases.
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Hersh Shefrin, Santa Clara University ISBN: Preface Goals and Structure The second edition of Behavioral Corporate Finance comes a decade after the publication of the first edition, which was the first textbook dedicated to providing instructors with a comprehensive pedagogical approach for teaching students how behavioral concepts apply to corporate finance.
This second edition contains a great deal of new material, as the academic literature in behavioral corporate finance a decade ago was nascent. Notably, in the last 10 years this literature has mush-roomed, and so the second edition has much upon which to draw.
Feedback from adopters of the first edition provides testimony to the fact that the examples and cases in the first edition are unique in bringing behavioral corporate finance alive. This is especially true of the minicases that conclude each chapter of the first edition. The second edition contains a completely new set of minicases. However, almost all of the minicases used in the first edition are still available in the Additional Resources available online that accompany each chapter.
The goals and structure of the second edition are the same as in the first edition. The primary goal is to identify the key psychological obstacles to value maximizing behavior, along with steps that managers can take to mitigate the effects of these obstacles.
In this respect, instructors should view this book as a complement to traditional texts in corporate finance, not as a substitute. Notably, neither students nor instructors require a background in psychology to understand the key psychological concepts. All the key concepts can be grasped intuitively, and are easily related to financial decisions.
The second edition can be viewed as something of an out-of-sample test. Most of the examples and cases identified psychological phenomena in specific companies.
The second edition provides an opportunity to trace the implications of those phenomena over the subsequent decade. Readers can judge for themselves whether the rest of those stories were random outcomes, or instead natural outcomes of the underlying psycho-logical phenomena being present. The same remark applies to the book Ending the Management Illusion, which is a companion treatment to the first edition and analyzes a completely different set of companies.
Readers can judge for themselves whether, after the publication of the book, the companies identified as being psychologically smart went on to become successful and whether those that were identified as being psychologically challenged went on to exhibit poor performance, if not outright failure. Based upon advice from reviewers, the second edition features two new chapters, and some rearrangement of chapter order from the first edition.
The first new chapter, Chapter 1, introduces the psychological foundations in depth. As a result, instructors no longer need to rely on online Additional Resources for this material. The second new chapter is Chapter 13, on investments. This chapter extends the discussion from the application of behavioral concepts to corporate finance alone to their application to investments.
As a result, the book can be used to teach dedicated courses in behavioral finance, not just corporate finance. To this end, instructors can use the book to teach behavioral finance in much the same order that they teach traditional finance: corporate finance first, followed by investments. At the same time, the book has a modular structure, and therefore can be used as a secondary text in regular investment courses as well as regular corporate finance courses.
In this regard, Chapter 1, which provides the behavioral foundations, Chapter 3 on valuation, and Chapter 5 on market efficiency apply to investments as well to corporate finance.
As was mentioned in the Preface to the first edition, many traditional finance textbooks, in both corporate finance and investments, have added behavioral chapters. These additions serve as testimonials to the importance of behavioral ideas for finance. At the same time, there is a limit to how much can be accomplished within the confines of a single chapter, especially when it comes to integrating behavioral concepts into the treatment of traditional topics.
Coverage of behavioral issues in traditional texts through a single-chapter approach has tended to be at best surface level, providing students with a behavioral flavor but not with the in-depth skills required to understand, identify, and deal with behavioral phenomena. Teaching behavioral corporate finance is much more effective when the primary focus is a specific topic such as capital budgeting or capital structure, and the discussion focuses on the psychological dimension of the topic in question.
In contrast, placing primary focus on psychological phenomena rather than specific corporate finance topics shifts attention away from integration. A similar remark applies to investments. For example, lumping technical analysis and behavioral finance into a single chapter, as some authors do, is not only misleading but also takes focus away from the very significant behavioral dimension in almost all other aspects of investment.
This book provides instructors in mainstream finance courses with a resource that will allow them to identify the behavioral dimension in each topic they teach, and offer their students an integrated approach that combines traditional and behavioral perspectives.
Organizational Design This book identifies the key behavioral concepts associated with every major topic in corporate finance: capital budgeting, capital structure, valuation, dividend policy, corporate governance, and mergers and acquisitions. However, the book provides only a brief summary of the traditional approach to each topic, whose purpose is to provide context.
Instructors are assumed to teach the traditional approach from the traditional textbook of their choice. Instructors who use this book as a behavioral supplement in a traditional finance course can cover topics in the traditional manner, and then follow up the discussion by introducing the behavioral dimension. Instructors who use this book to teach a behavioral finance course can build on prior finance courses, and briefly summarize the traditional approach before introducing the behavioral approach to each topic.
Questions and minicases appearing at the end of the chapters are designed to help students recognize the strength, magnitude, and persistence of behavioral phenomena in financial decision making. Chapter 11 broadens the discussion of Chapter 9 from the first edition and makes the point that financial management means more than corporate finance.
Rather, financial management entails the integration of corporate finance and management, meaning the incorporation of the psychological dimension into corporate financial decision making. Failures in financial management, especially risk management, lie at the heart of the global financial crisis.
Examples from the financial crisis illustrate the main ideas in the chapter. With a few exceptions, each chapter is devoted to a traditional topic. The exceptions are Chapters 1, 2, 11, and Chapters 1 and 2 introduce the key psychological concepts used throughout the book. Chapter 1 provides a detailed presentation of 10 important psychological concepts, with the emphasis on psychology, not finance.
Chapter 2 is devoted to explaining how these concepts apply to finance, and it is a prerequisite for every subsequent chapter. Every other chapter explains how concepts developed in Chapters 1 and 2 apply to traditional topics in corporate finance and to investments.
Notably, Chapter 2 has been written to be self-contained, and so those wishing to proceed directly to the application of the 10 key psychological concepts can do so without working first through Chapter 1. For example, Chapter 1 introduces students to the concept of excessive optimism, and Chapter 2 describes how it impacted the decisions of the CEO of a specific firm.
Chapter 3 then describes how excessive optimism affects valuation. Chapter 4 describes how excessive optimism affects capital budgeting. Chapter 7 describes how excessive optimism affects capital structure. The main issue is not to be repetitive about the fact that corporate managers tend to be excessively optimistic. The main issue is to explain how excessive optimism impacts the different decisions that managers are called upon to make. This chapter makes the point that financial management involves more than just corporate finance, but instead entails the integration of corporate finance and management.
Chapters follow a set format. Behavioral objectives for learning introduce each chapter. Most chapters have a section that provides a brief overview of the traditional approach to the topic at hand. The remainder of the chapter then focuses on developing the behavioral concepts and applications. These are intended to help students reflect on how their own minds approach information and decision tasks.
Chapter questions provide focused exercises to help students learn the key points in the chapter. Every chapter concludes with a minicase, allowing students the opportunity to develop the skills of recognizing psychological phenomena within the context of real world events.
The behavioral objectives, concept preview questions, thematic boxes and chapter summaries contain the major points in the book. Illustrative examples, anecdotes and cases serve as the most effective way of communicating general findings and ideas. Most students relate easily to stories. However, the stories are only intended to communicate the main points.
The general evidence is based on the academic studies described in the book. As was mentioned above, Chapters 1 and 2 are prerequisites to all the remaining chapters. However, all remaining chapters essentially stand alone, so that instructors have the flexibility to choose whichever chapters they deem appropriate, and in whatever order they find most useful. Intended Market: Corporate Finance Courses I have written Behavioral Corporate Finance for use in any course devoted to teaching either corporate finance or behavioral finance.
For traditional courses in corporate finance, I see the book being used as a supplement to any traditional textbook that serves as the primary course text. This pairing of a traditional primary corporate finance text and Behavioral Corporate Finance provides a powerful way to augment the teaching of traditional skills with an understanding of the psychological factors that influence the application of these skills in practice.
In this respect, Behavioral Corporate Finance contains many real-world examples and case studies, designed to bring the behavioral concepts to life. Similar remarks apply to courses in Investment, which can draw on Chapter Behavioral pitfalls represent one of the most important obstacles to the successful implementation of the skills taught in traditional corporate finance courses.
When it comes to improving the financial decision process, understanding these pitfalls is absolutely essential. Therefore, a crucial challenge is to teach students nudging techniques for avoiding psychological pitfalls identified in the behavioral decision literature, as well as how to deal with others that do fall into the associated traps.
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Something went wrong. Please try your request again later. OK Follow to get new release updates and improved recommendations About Hersh Shefrin Hersh Shefrin is one of the pioneers in the behavioral approach to economics and finance. The January issue of CFO magazine lists him among the academic stars of finance. A article in the American Economic Review listed him as one of the top fifteen economic theorists to have influenced empirical work. Morgan Chase as one of the top ten books published since
BEHAVIORAL CORPORATE FINANCE HERSH SHEFRIN PDF