Behavioral finance research indicates that traditional ideas of corporate governance may be too simplistic. The board has to look beyond finding the optimal incentive contract and instead find the CEO with the experience, personality, and management style suited to the company’s actual challenges. But this means the board has to know what type of CEO it needs.
Theories from behavioral finance are at the forefront of explaining differences in corporate financial policies and capital structures. Most important, however, behavioral corporate finance has reintroduced humanity — in all its complexity and subtlety — into corporate finance, where indeed it belongs.
David E. Adler (ADLHumble@aol.com) is the coeditor, with Michael A. Bernstein, of Understanding American Economic Decline (Cambridge University Press, 1993). He has produced numerous documentaries for the BBC and is producing a forthcoming PBS special on health care and retirement in the U.S.