New working paper on stranded assets and the psychological vulnerabilities of the oil companies published
Dane Rook & Ben Caldecott (2015) Cognitive biases and Stranded Assets: Detecting psychological vulnerabilities within International Oil Companies (Working Paper) Smith School of enterprise and the Environment
Shareholders who invest in international oil companies (IOCs) need to respond to the trend of increasing ‘density’ of capital expenditures (capex) (Rook and Caldecott 2015). More capital is being concentrated in fewer larger projects. With a larger volume of capex being spread across a smaller number of projects, IOCs require a deeper understanding of the potential risks facing individual projects. Increasing capex density means that IOCs cannot rely exclusively – or even primarily – on the moderating effects of diversification to ‘even out’ performance.
But even if more resources are allocated to risk management, this may be offset by the greater likelihood of being harmed by any of a plethora of cognitive biases. Some of these potential psychological errors are listed below and become more likely as projects become more costly, complicated, and of lengthier duration. Such cognitive biases by IOC leadership, which could grow with rising capex density, can increase the risk of asset stranding.
The purpose of this paper is to equip shareholders with a novel toolkit for detecting where risks from cognitive bias are likely to be most severe among IOCs. This toolkit augments (and should be read in conjunction with) earlier work on capex density among IOCs (see Rook and Caldecott (2015)).