GOALS AND STRUCTURE

Behavioral Corporate Finance identifies 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. The main goal of the book is to help students learn how to put the traditional tools of corporate finance to their best use, and mitigate the effects of psychological obstacles that reduce value.

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.

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.

I have written Behavioral Corporate Finance with the idea that instructors will cover corporate finance topics in the traditional manner, and then will follow up the discussion by introducing the behavioral dimension. Some instructors may choose to lecture on the behavioral material, using PowerPoint slides provided for this purpose. Others might simply assign the chapters as additional reading. In any case, the main learning objectives for students pertain to an appreciation of the obstacles that stand in the way of implementing traditional techniques. Questions and mini-cases appearing at the end of the chapters are designed to help students recognize the strength, magnitude, and persistence of behavioral phenomena in corporate financial decision making.

With one exception, each chapter is devoted to a traditional topic. The exception is Chapter 1, which presents the key psychological concepts used throughout the book. Chapter 1 is a prerequisite for every other chapter. Every other chapter explains how concepts developed in chapter 1 apply to traditional topics in corporate finance.

For example, Chapter 1 introduces students to the concept of excessive optimism. Chapter 2 then describes how excessive optimism affects valuation. Chapter 3 describes how excessive optimism affects capital budgeting. Chapter 6 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.

Chapter 9 is entitled Group Process, and is the only chapter topic that does not have an obvious counterpart in traditional textbooks on corporate finance. However, much of that chapter deals with process issues in corporate boards, and so can be viewed as an extension of Chapter 8 that covers corporate governance.

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.

In order to help students focus on the underlying psychological issues, "Concept Preview Questions" are used. These are intended to help students reflect on how their own minds approach information and decision tasks. Thematic boxes, labeled "Behavioral Pitfalls" provide brief illustrations of business situations that feature the psychological phenomena being discussed. Hints for mitigating bias and error are provided in thematic boxes labeled "Debiasing for Better Decisions."

Chapter summaries review the main points of the chapter in relation to the behavioral objectives. 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, Chapter 1 is a prerequisite 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 MBA level course devoted to teaching corporate 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.

Behavioral traps 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 traps is absolutely essential. Therefore, a crucial challenge is to teach students how to avoid falling into the behavioral traps identified in the behavioral decision literature, as well as how to deal with others that do fall into these traps.

In recent years, the authors of traditional textbooks have begun to incorporate topics from behavioral finance into revised editions. That is a welcome advance, in so far as the addition of real world phenomena is concerned. At the same time, the coverage of behavioral issues in traditional texts has tended to be at best surface level, providing students with a behavioral flavor but not in-depth skills required to understand, to identify, and to deal with behavioral phenomena.