1.

Critically evaluate the major differences between Expected Utility Theory and
Prospect Theory.
Expected utility theory
Expected utility theory (EUT) is a classical model that assumes that people are rational and
consistent in their preferences. According to EUT, the value of a decision is determined by
multiplying the probability of each outcome by its utility, which is a measure of how much
satisfaction or happiness it provides. For example, if you have a 50% chance of winning
$100 or a 50% chance of losing $50, the expected utility of this gamble is 0.5 x 100 - 0.5 x 50
= $25. EUT implies that you should always choose the option that maximizes your expected
utility, regardless of the risk involved.
Prospect theory
Prospect theory (PT) is a behavioral model that challenges some of the assumptions of EUT
and incorporates psychological factors that affect decision-making. According to PT, the
value of a decision is not based on the absolute outcomes, but on the gains and losses
relative to a reference point, which is usually the status quo. For example, if you have $100
and you face a 50% chance of winning $50 or a 50% chance of losing $50, the expected
value of this gamble is still $25, but the prospect value is 0.5 x 50 - 0.5 x 50 = 0, because you
are not gaining or losing anything from your current situation. PT also suggests that people
are more sensitive to losses than to gains, and that they tend to overestimate low
probabilities and underestimate high probabilities.

Expected Utility Theory (EUT) and Prospect Theory (PT) are two prominent theories in the
field of decision-making under uncertainty. Although EUT has long been considered the
dominant framework, PT has introduced significant innovations that address some of the
limitations of EUT. In this evaluation, I will critically analyze the major differences between
the two theories:
1. Utility Function:
- EUT: EUT assumes individuals possess a consistent and concave utility function, signifying
diminishing marginal utility of wealth. It posits that decision-makers evaluate options based
on the expected value of outcomes and their associated utilities.
- PT: PT introduces an S-shaped value function, capturing the asymmetry in individuals'
evaluation of gains and losses. It suggests that individuals exhibit loss aversion, wherein
losses have a higher psychological impact than equivalent gains.
Critique: PT's incorporation of the value function and loss aversion provides a more realistic
portrayal of human decision-making behavior, addressing one of EUT's limitations, which
assumes linear utility functions.
2. Probability Weighting:
- EUT: EUT assumes individuals accurately assess and weigh probabilities when making
decisions, adhering to the principles of probability theory.
- PT: PT proposes that individuals exhibit probability weighting, whereby they subjectively
distort probabilities. It argues that individuals overweight low probabilities and underweight
moderate to high probabilities.
Critique: PT's inclusion of probability weighting acknowledges the cognitive biases and
heuristics individuals employ when evaluating probabilities. This recognition addresses a
crucial limitation of EUT, which assumes individuals consistently adhere to the principles of
probability theory.
3. Reference Point:
- EUT: EUT does not explicitly consider a reference point or psychological benchmark
against which individuals evaluate outcomes.
- PT: PT introduces the concept of a reference point, acting as a focal point for decision-
making. It suggests that individuals evaluate outcomes based on changes relative to this
reference point.
Critique: PT's incorporation of a reference point provides a more comprehensive
understanding of decision-making, recognizing that individuals' evaluations are not solely
based on absolute outcomes but are influenced by the reference point. This addresses a
limitation of EUT, which fails to account for the role of reference points.
In conclusion, PT offers significant advancements over EUT by integrating the value function,
loss aversion, probability weighting, and reference point. These developments provide a
more realistic and nuanced understanding of decision-making under uncertainty. While EUT
has been influential, PT addresses some of its limitations and offers a more comprehensive
framework for explaining human decision-making behavior.
2. Explain the term “heuristic driven bias”. Use examples to illustrate your answer.
Discuss the heuristic-driven biases involved in portfolio selection and their
consequences for investors.
Heuristic-driven bias refers to the influence of mental shortcuts or heuristics on decision-
making, leading to biased or suboptimal outcomes. Heuristics are cognitive tools that the
brain uses to simplify complex problems and make quick judgments. While heuristics can be
helpful in processing information efficiently, they can also introduce biases and errors in
decision-making.
When individuals rely on heuristics to make judgments or decisions, they may overlook
relevant information, prioritize certain factors over others, or make judgments based on
incomplete or distorted information. These biases can arise due to cognitive limitations, the
need for quick decision-making, or the influence of social and cultural factors.
Examples of heuristic-driven biases include:
Availability bias: This bias occurs when individuals judge the likelihood or frequency of an
event based on how easily they can recall relevant examples or information. For example, if
someone has recently heard news reports of shark attacks, they may overestimate the
probability of a shark attack happening to them, even if the actual risk is low.
Anchoring bias: This bias refers to the tendency of individuals to rely heavily on the first
piece of information they encounter when making a decision, even if it is irrelevant or
arbitrary. For instance, a person may be influenced by the initial price suggested for a
product and anchor their decision-making process around that price, ignoring other relevant
factors.
Representativeness bias: This bias involves making judgments or decisions based on
how well an object or event matches a mental prototype or stereotype, rather than
considering relevant statistical information. For instance, if someone believes that all lawyers
are wealthy, they may assume that a lawyer they meet is also wealthy, without considering
other factors that may affect their financial situation.
In portfolio selection, some common heuristic driven biases and their consequences
are:
Home bias - Preference for investing in domestic rather than foreign stocks due to familiarity.
Can lead to under-diversification.
Herd behavior - Following the actions of others and investing in popular/current trends. Can
cause investors to buy high and sell low against their interest.
Anchoring to past returns - Letting recent good performance unduly influence future outlook.
Makes rational rebalancing to changing conditions difficult.
Framing effects - Treat functionally equal choices differently due to presentation. For
example, describing losses as gains influences risk tolerance.

By understanding how heuristics can introduce biases, investors may be able to make
portfolio decisions objectively rather than relying on mental shortcuts that are prone to error.
This improves the chances of optimal long term outcomes.
3. Critically evaluate with a suitable example the Allais Paradox. Which of the
behavioral finance theories would better explain the phenomena described above and
how?
The Allais Paradox is a decision-making paradox that challenges the traditional economic
theory of expected utility. It highlights the inconsistencies in human decision-making when
faced with choices involving uncertain outcomes and monetary gains or losses.
The paradox involves two scenarios that are presented to individuals. In the first scenario,
individuals are given a choice between two options: Option A, which offers a 100% chance of
winning $1 million, and Option B, which offers an 79% chance of winning $1 million and an
21% chance of winning nothing. In this scenario, most individuals tend to choose Option A,
as it offers a guaranteed win.
In the second scenario, individuals are given a choice between Option C, which offers a
100% chance of winning $5 million, and Option D, which offers an 79% chance of winning $5
million and an 21% chance of winning nothing. In this scenario, most individuals tend to
choose Option D, despite the fact that it has the same probabilities as Option B in the first
scenario.
This paradox demonstrates that individuals are risk-averse when it comes to gains (choosing
Option A over Option B) but risk-seeking when it comes to losses (choosing Option D over
Option C). This contradicts the expected utility theory, which assumes that individuals make
decisions based on maximizing expected utility.
A suitable example to illustrate the Allais Paradox is the decision-making process of
investors. Let's say an investor is given a choice between two investment options. Option X
offers a 100% chance of gaining $100,000, while Option Y offers an 79% chance of gaining
$100,000 and an 21% chance of gaining nothing.
Based on the expected utility theory, the investor should be indifferent between the two
options since the expected value of both options is the same ($100,000). However, in reality,
many investors would choose Option X, as it offers a certain gain without any risk of losing
the investment.
Now, let's consider a second scenario where the investor is given a choice between Option
Z, which offers a 100% chance of gaining $500,000, and Option W, which offers an 79%
chance of gaining $500,000 and an 21% chance of gaining nothing. In this case, many
investors would choose Option W, despite having the same probabilities as Option Y in the
first scenario.
This example illustrates the Allais Paradox by showing how investors exhibit risk-averse
behavior when it comes to gains (choosing Option X over Option Y) but risk-seeking behavior
when it comes to losses (choosing Option W over Option Z). This paradox challenges the
traditional economic theory and suggests that individuals' decision-making is influenced by
factors other than expected utility.
Which of the behavioral finance theories would better explain the phenomena
described above and how?
The Allais Paradox can be better explained by the prospect theory, which is a behavioral
finance theory developed by Daniel Kahneman and Amos Tversky. The prospect theory
suggests that individuals do not make decisions based solely on expected utility but are also
influenced by cognitive biases and subjective factors.
In the case of the Allais Paradox, prospect theory provides a more comprehensive
explanation for the observed behavior compared to the traditional expected utility theory.
Prospect theory introduces the concepts of loss aversion and probability weighting, which
can explain the inconsistencies in decision-making.
Loss aversion refers to the tendency of individuals to strongly prefer avoiding losses over
acquiring gains. In the Allais Paradox, individuals exhibit risk-aversion when it comes to
gains, choosing Option A over Option B in the first scenario. This behavior can be explained
by loss aversion, as Option A provides a certain gain without any risk of losing the
investment, which is more appealing to individuals.
Probability weighting refers to the tendency of individuals to assign different weights or
subjective probabilities to outcomes. In the Allais Paradox, individuals exhibit risk-seeking
behavior when it comes to losses, choosing Option D over Option C in the second scenario.
This behavior can be explained by probability weighting, as individuals overweight the small
probability of winning nothing in Option D and are willing to take the risk for a potentially
higher gain.
Prospect theory, with its concepts of loss aversion and probability weighting, better captures
the cognitive biases and subjective factors that influence decision-making in uncertain
situations. It explains how individuals' preferences for gains and losses deviate from the
predictions of traditional expected utility theory. Thus, prospect theory provides a more
suitable explanation for the phenomena described in the Allais Paradox.
4. Evaluate critically what the different types of financial market efficiency are and
explain the challenges from behavioral finance to these
The different types of financial market efficiency are weak-form efficiency, semi-strong
efficiency, and strong-form efficiency. Each type represents a different level of information
incorporation into stock prices. However, behavioral finance poses challenges to these
theories, suggesting that market inefficiencies can arise due to psychological and behavioral
factors. Here are some critical evaluations and examples:
Weak-Form Efficiency:
Weak-form efficiency assumes that all past market prices and trading information are already
reflected in current stock prices. However, behavioral finance challenges this by suggesting
that investor biases can lead to deviations from efficient market prices. For example,
overconfidence bias might cause investors to believe they have superior information or skills
when analyzing historical price patterns. This can create mispricings as investors overreact
or underreact to historical data.
Semi-Strong Efficiency:
In semi-strong efficiency, all publicly available information is incorporated into stock prices.
Behavioral finance challenges this by highlighting the impact of herding behavior. For
instance, during the dot-com bubble, investors followed the crowd and invested heavily in
technology stocks, ignoring fundamental factors. This led to overvaluation and subsequent
market crash, indicating that market prices were not efficiently incorporating all available
information.
Strong-Form Efficiency:
Strong-form efficiency assumes that all information, including public and private, is instantly
reflected in stock prices. However, behavioral finance challenges this by acknowledging the
possibility of insider trading. Insider information can give some investors an informational
advantage, leading to market inefficiencies. For example, if corporate executives trade based
on non-public information, it suggests that market prices may not fully capture all available
information.
These examples illustrate the challenges from behavioral finance to different types of
financial market efficiency. They show that investor biases, herding behavior, and
informational advantages can cause deviations from efficient pricing. This highlights the
limitations of traditional efficiency theories and emphasizes the importance of considering
psychological and behavioral factors in understanding market dynamics.
5. From a behavioural finance perspective, critically evaluate what role the ‘Winner’s
Curse’ plays in takeovers and initial public offerings of shares.
From a behavioral finance perspective, the role of the 'Winner's Curse' in takeovers and
initial public offerings (IPOs) of shares is critically evaluated. The Winner's Curse refers to
the phenomenon wherein the winning bidder in an auction or the investor who purchases
shares in an IPO ends up paying more than the true value of the asset. This concept is
rooted in behavioral biases and has implications for decision-making in these contexts.
In takeovers, the Winner's Curse can occur due to overconfidence bias, wherein bidders may
engage in aggressive bidding in an attempt to secure the deal. However, this overconfidence
can lead to an overestimation of the target company's value and result in the winning bidder
paying a price that exceeds its true worth. This overpayment can have negative
consequences for the acquiring company's shareholders.
Similarly, in IPOs, the Winner's Curse can manifest through herding behavior and the fear of
missing out (FOMO) among investors. This can drive them to bid up the price of the newly
listed company's shares, believing that others possess superior knowledge. However, this
bidding frenzy can lead to an overvaluation of the shares, causing IPO investors to pay a
premium that exceeds the intrinsic value of the stock. Subsequently, when the market
corrects and the stock price adjusts, IPO investors may experience financial losses.
The presence of the Winner's Curse in both takeovers and IPOs underscores the influence of
behavioral biases on decision-making and the potential for suboptimal outcomes.
Overconfidence, herding behavior, and FOMO can drive investors to pay prices that do not
align with the true value of the assets. Consequently, winning bidders in takeovers or IPO
investors may find themselves burdened with overpaid acquisitions or overvalued shares,
resulting in diminished returns or financial losses.
It is crucial for market participants to recognize the existence of the Winner's Curse and the
underlying behavioral biases. By acknowledging these biases and conducting thorough due
diligence, investors can mitigate the risks associated with overpaying for assets in takeovers
or IPOs.
6. With the aid of examples, define and explain the following psychological biases and
their impact on investors and financial markets:
+ Overconfidence
+ Mental accounting
+ Herding
+ Illusion of Control
1. Overconfidence:
Overconfidence bias refers to the tendency of individuals to have excessive confidence in
their own abilities, knowledge, or predictions. In investing, overconfident investors may
believe they have superior skills in stock selection or market timing, leading them to take on
excessive risks or trade more frequently. This bias can lead to suboptimal investment
decisions and increased volatility in financial markets. For example, an investor believes they
have exceptional market timing skills and decides to sell all their stocks just before a market
crash, expecting to buy them back at lower prices. However, the market rebounds quickly,
and they miss out on significant gains.
2. Mental Accounting:
Mental accounting bias involves individuals segregating their money into different mental
accounts based on arbitrary criteria, rather than considering it as a unified pool of wealth. In
investing, mental accounting can lead to suboptimal decision-making by treating different
investments differently, even if they have similar risk and return characteristics. For instance,
an investor receives a windfall inheritance and decides to use it solely for luxury purchases
instead of investing it for long-term growth. As a result, they miss the opportunity to grow
their wealth and secure their financial future.
3. Herding:
Herding bias refers to the tendency of individuals to follow the actions and decisions of a
larger group, rather than making independent judgments. In financial markets, herding
behavior can lead to the formation of bubbles and market inefficiencies. For example, during
a bull market, many investors start buying shares of a popular tech company solely based on
the recommendation of a few influential analysts. This causes a surge in demand, resulting in
an artificially inflated stock price that is not justified by the company's fundamentals.
4. Illusion of Control:
The illusion of control bias occurs when individuals believe they have more control over an
outcome than they actually do. In investing, this bias can lead investors to believe they can
predict or influence market movements, leading to excessive trading or overconfidence. For
example, a day trader believes that they can consistently predict short-term price movements
based on technical analysis and starts making frequent trades. However, their performance
consistently lags behind the market, resulting in lower returns and higher transaction costs.
These psychological biases can have a significant impact on investors and financial markets.
They can lead to suboptimal investment decisions, increased volatility, market inefficiencies,
and mispricing of assets. Recognizing and mitigating these biases is essential for investors to
make more rational and informed decisions.
7. Explain impact of emotion on individuals’ financial decision-making. Give
appropriate examples (cái thứ 7 chép 3 cái đầu thôi nhé)
Emotions play a significant role in individuals' financial decision-making, often influencing
their behavior and choices. Here are examples of how different emotions can impact financial
decisions:
Fear:
During a market downturn, fear can lead individuals to panic and sell their investments at low
prices, fearing further losses. This fear-driven selling can result in significant portfolio losses.
For example, during the 2008 financial crisis, many investors sold their stocks in a panic,
missing out on the subsequent market recovery.
Greed:
Greed can drive individuals to take excessive risks in pursuit of higher returns. For instance,
investors may be tempted to invest in speculative assets or engage in market timing to
maximize profits. However, these actions can expose them to significant losses if the
investments perform poorly or if the market does not move in their favor.
Overconfidence:
Overconfidence can lead individuals to underestimate risks and overestimate their abilities,
resulting in poor financial decisions. For example, an overconfident investor may ignore
diversification principles and concentrate their portfolio in a single stock or sector, believing
they have superior knowledge or insight.
Regret:
Regret can influence decision-making when individuals focus on past mistakes or missed
opportunities. This can lead to chasing past winners or avoiding new investments due to fear
of making another regretful decision. For instance, an investor may refrain from investing in a
particular stock because they regret missing out on its previous price appreciation.
Loss Aversion:
Loss aversion refers to the tendency of individuals to feel the pain of losses more strongly
than the pleasure of equivalent gains. This bias can result in risk-averse behavior and a
reluctance to take necessary investment risks. For example, an investor may hold onto a
losing stock, hoping it will rebound, rather than cutting their losses and reallocating the funds
to better-performing investments.
Excitement:
Excitement can lead to impulsive financial decisions, such as impulsive buying or investing in
speculative assets without proper analysis or due diligence. For instance, individuals may
invest in highly volatile cryptocurrencies during periods of excitement and hype, without
considering the potential risks and long-term viability of the investment.
Emotions can significantly impact financial decision-making, often leading to suboptimal
outcomes. Recognizing and managing these emotions is crucial for making rational and
informed financial decisions.
8. How personality traits affect individuals’ financial decision-making? Use examples
to illustrate your answers. (2-3 cái đầu thôi)
Personality traits can have a significant impact on individuals' financial decision-making,
shaping their attitudes towards risk, their ability to handle financial stress, and their overall
approach to managing money. Here are examples of how different personality traits can
influence financial decisions:
Risk tolerance:
Some individuals have a higher tolerance for risk, while others are more risk-averse. For
example, an adventurous and risk-loving individual may be more inclined to invest in high-
risk assets like stocks or cryptocurrencies, seeking the potential for higher returns. On the
other hand, a risk-averse person may prefer to invest in safer assets like bonds or savings
accounts, prioritizing capital preservation.
Impulsivity:
Individuals with a high level of impulsivity may be prone to making impulsive financial
decisions without fully considering the consequences. For instance, an impulsive spender
may make impulsive purchases without considering their long-term financial goals or
budgeting constraints. This behavior can lead to financial instability and debt accumulation.
Self-control:
Individuals with high self-control tend to make disciplined financial decisions and are better at
sticking to long-term financial plans. For example, someone with strong self-control may
prioritize saving and investing for retirement, even when faced with short-term temptations to
spend. This trait can lead to more prudent and successful financial management.
Financial anxiety:
Some individuals may experience higher levels of financial anxiety, which can impact their
decision-making. For instance, someone with high financial anxiety may avoid investing in
the stock market altogether, fearing potential losses. This fear-based approach can result in
missed opportunities for wealth accumulation and long-term growth.
Procrastination:
Procrastination can hinder individuals' financial decision-making, leading to missed deadlines
for bill payments, delayed investment decisions, or failure to create a financial plan. For
example, someone who procrastinates may delay setting up an emergency fund or starting a
retirement savings account, which can have long-term implications for their financial well-
being.
Confidence:
Individuals with high confidence in their financial knowledge and decision-making abilities
may be more likely to take on complex financial tasks, such as managing their own
investments or starting a business. However, overconfidence can also lead to excessive risk-
taking and poor financial decisions, as discussed earlier.
These examples highlight how different personality traits can influence individuals' financial
decision-making, impacting their risk tolerance, impulse control, financial anxiety levels, and
ability to plan and follow through with financial goals. Understanding one's own personality
traits and their potential impact on financial decisions can help individuals make more
informed choices and develop strategies to mitigate any detrimental effects.
9. Discuss the significant role of de-biasing in individuals’ financial decision-making.
Give appropriate examples. (2 – 3 cái đầu)
De-biasing plays a significant role in individuals' financial decision-making by helping them
overcome cognitive biases and make more rational and informed choices. Here are
examples of how de-biasing techniques can be applied:
Education and Awareness:
One effective de-biasing technique is providing individuals with education and awareness
about common cognitive biases that can impact financial decision-making. For example,
educating investors about the impact of overconfidence bias can help them recognize when
they may be overly confident in their abilities and make more cautious investment decisions.
Decision-Making Frameworks:
Providing individuals with decision-making frameworks can help them make more rational
choices. For instance, a decision-making framework like the "pros and cons" list can help
individuals weigh the potential risks and benefits of a financial decision, reducing the
influence of biases such as overconfidence or anchoring.
Emotional Regulation:
Emotional regulation techniques can help individuals manage their emotions and make more
objective financial decisions. For instance, taking a step back, practicing mindfulness, or
seeking advice from a trusted financial advisor can help individuals make decisions based on
logic and analysis rather than being driven by emotions like fear or greed.
Diversification and Asset Allocation:
Encouraging individuals to diversify their investment portfolios and follow sound asset
allocation strategies can help mitigate biases such as overconfidence or herding. By
spreading their investments across different asset classes and sectors, individuals can
reduce their exposure to specific risks and potentially enhance their long-term returns.
Long-Term Planning:
Encouraging individuals to focus on long-term financial goals and develop comprehensive
financial plans can help reduce the impact of biases like loss aversion or myopia. By having a
clear roadmap and understanding the potential consequences of short-term decisions,
individuals can make more disciplined and rational choices.
Regular Evaluation and Review:
Regularly evaluating and reviewing investment decisions can help individuals identify and
correct any biased thinking or suboptimal choices. For example, conducting periodic portfolio
reviews with a financial advisor can provide individuals with objective feedback and help
them adjust their investment strategy based on their goals and market conditions.
These examples highlight how de-biasing techniques can help individuals make more
rational and informed financial decisions. By understanding and addressing cognitive biases,
individuals can mitigate the impact of biases and improve their overall financial decision-
making process.
10. The bankruptcy of Enron was the largest U.S. bankruptcy at the time, now second
only to the failure of Worldcom. Explain how social forces may have influenced the
behavior of the board of directors and financial analysts and lead to this scandal. (m
chép cái này nhé t chép câu 10 dưới)
The scandalous bankruptcy of Enron in 2001 was a result of various social forces that
influenced the behavior of the board of directors and financial analysts. These social forces
include a culture of greed and excessive risk-taking, groupthink, regulatory failures, and
unethical practices. Here is an explanation of how these factors played a role in the Enron
scandal:
Culture of greed and risk-taking: Enron had fostered a culture that prioritized financial
success and personal gain above all else. This culture incentivized employees, including the
board of directors and financial analysts, to engage in unethical and fraudulent practices to
achieve high profits. The relentless pursuit of financial success without proper regard for
ethical boundaries contributed to the scandal.
Groupthink: Groupthink is a phenomenon where individuals' desire for consensus and
harmony overrides their critical thinking abilities. In Enron's case, the board of directors and
financial analysts were under enormous pressure to maintain the company's image as
successful and financially sound. This pressure led to a culture where dissenting opinions
were discouraged and groupthink prevailed, preventing any questioning of the company's
unethical practices.
Regulatory failures: The regulatory environment at the time failed to effectively monitor and
control corporate activities, allowing Enron to engage in fraudulent activities for an extended
period. Regulatory bodies, such as the Securities and Exchange Commission (SEC), were
unable to detect and prevent Enron's accounting manipulations and misleading financial
statements. This lack of oversight enabled Enron's board of directors and financial analysts
to continue their unethical behavior without significant repercussions.
Unethical practices: Enron's board of directors and financial analysts engaged in various
unethical practices to manipulate the company's financial statements and deceive investors.
One prominent example was the creation of off-balance-sheet entities, known as Special
Purpose Entities (SPEs), which allowed Enron to hide its debt and inflate its profits. These
unethical practices were driven by the desire to maintain the illusion of financial success and
attract more investors.
In summary, the Enron scandal was influenced by social forces such as a culture of greed
and risk-taking, groupthink, regulatory failures, and unethical practices. These factors
contributed to the board of directors and financial analysts engaging in fraudulent activities,
ultimately leading to the largest U.S. bankruptcy at the time.
10. The bankruptcy of Enron was the largest U.S. bankruptcy at the time, now second
only to the failure of Worldcom. Explain how social forces may have influenced the
behavior of the board of directors and financial analysts and lead to this scandal.
The Enron scandal was a result of a complex interplay of social forces that influenced the
behavior of the board of directors and financial analysts. These social forces include
organizational culture, groupthink, and the pressure to meet financial expectations.
Firstly, Enron had a highly competitive and aggressive organizational culture that placed a
strong emphasis on financial performance. The company fostered an environment where
employees were encouraged to take risks and push the boundaries of accounting practices.
This culture created a sense of invincibility and an unwavering belief in the company's ability
to generate profits. As a result, the board of directors and financial analysts may have been
driven to engage in unethical practices to meet the high expectations and maintain the
illusion of success.
Secondly, groupthink played a significant role in the Enron scandal. Groupthink occurs when
individuals prioritize consensus and harmony within a group over critical thinking and
independent decision-making. In the case of Enron, the board of directors and financial
analysts may have succumbed to groupthink, as they were surrounded by like-minded
individuals who reinforced their beliefs and downplayed any concerns or dissenting opinions.
This groupthink mentality may have prevented them from questioning and critically examining
the unethical accounting practices and financial misrepresentation within the company.
Lastly, the pressure to meet financial expectations played a crucial role in the Enron scandal.
Enron was under constant pressure to deliver strong financial results to satisfy investors and
maintain its stock price. This pressure created a perverse incentive for the board of directors
and financial analysts to manipulate financial statements and engage in fraudulent activities
to meet the expectations of shareholders and maintain the company's perceived value. The
fear of disappointing shareholders and the desire to retain their own positions of power may
have influenced their behavior and led to unethical decision-making.
In summary, the bankruptcy of Enron was influenced by social forces such as the aggressive
organizational culture, groupthink, and the pressure to meet financial expectations. These
factors created an environment where unethical practices were tolerated and even
encouraged, leading to the eventual collapse of the company.