Making sense of business failure: a social psychological perspective on financial and legal judgments in the context of insolvency

The fate of a company and its directors in (near) insolvency situations is for an important part in the hands of financiers and legal professionals. Financiers need to assess the causes of the company’s decline as well as its future outlook, in order to establish whether refinancing makes sense or whether liquidation would be more economical. In insolvency proceedings, legal professionals also need to determine the causes of the company’s demise, as company directors risk being held personally liable if mismanagement is considered an important cause of the company’s downfall. Given the potentially adverse consequences of faulty judgments made by these parties, it is of utmost importance that a company’s decline and its directors’ actions are accurately assessed. Importantly, advances in psychological science have pointed out that humans are susceptible to so-called cognitive biases that can obfuscate otherwise sound judgments. This dissertation investigates to what extent cognitive biases cloud financiers' and legal professionals’ judgments and aims to further our understanding of these biases. In this dissertation, evidence is presented showing that both financiers and legal professionals can succumb to a range of biases, and it is suggested that moral judgments can play an important role in causing some of these biases. The dissertation concludes with a discussion on the implication of the findings for legal scholarship and legal practice. Coherent privaatrech