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Behavioural Finance Essay

3178 words - 13 pages

A Behavioural Finance view of the Deepwater Horizon Disaster of 2010
The Deepwater Horizon disaster of 2010 was the largest accidental marine oil spill the oil industry has ever seen. It claimed 11 lives and caused huge environmental damage on the shoreline of the Gulf of Mexico by discharging circa 4.9 million barrels of oil. There have been numerous enquiries and studies into the accident to try to understand what happened, the goal of the enquiries was to establish where the fault and therefore guilt lay in order to ascertain compensation. This report attempts to apply key concepts from behavioural finance with a view to understanding the thought processes behind the ...view middle of the document...

The competitive nature of the organization encouraged rivalries between units that almost resembled the rivalries between football clubs supporters. With each unit under pressure to offer higher returns a culture of cost cutting spread across the firm. This cost cutting compromised processes and in turn compromised safety across the board. This was highlighted in the Baker Report in the wake of the Texas City tragedy. BP’s senior executives sought to view safety through the prism of incident numbers and also to question employees recording incidents on whether they were true incidents. This method of measuring safety is a combination of the availability heuristic and also framing. The information was easy to gather, it’s easy to record individual incidents, and therefore was over weighted as senior managers used to demonstrate that safety was indeed getting better in the individual assets. The act of questioning employees who attempted to record incidents is an example of framing where one would attempt to ask the question a different way to get an answer that was more favourable. BP’s method of determining safety standards is also a consequence of the confirmation bias where evidence is interpreted in the way one wishes to see it. Confirmation biases are normally a consequence of system 1 thinking. In “Thinking Fast and Slow” Daniel Kahneman defines System 1 thinking as “ System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control”. I wouldn’t for a moment suggest that BP’s senior managers didn’t think when set up their flawed method of measuring safety but they used System 1 thinking when they attempted to simplify it to a metric that was easy to measure and easy to understand. Safety is a far bigger issue than simply incident numbers, as we saw with Texas City, Prudhoe Bay and finally Deepwater Horizon there were underlying systemic flaws that only System 2 thinking would enable to be discovered. In “Thinking Fast and Slow” Daniel Kahneman defines System 2 thinking as “System 2 allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice and concentration”. In other words System 2 thinking doesn’t encourage snap judgements which would be enabled under System 1.
In March 2005 an explosion at BP’s Texas City refinery killed 15 people and injured a further 180. The financial losses to BP exceeded $1.5 billion. The political fallout of this disaster could be seen in the fact that a former Secretary of State, James Baker, was appointed to lead a committee to investigate what had happened. The committee’s findings were shocking as they highlighted serious safety and maintenance shortcomings which were driven as a result of cost cutting. Shefrin (2008) profiled BP as an organization that possessed all the psychological weaknesses of high...

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