When rationality fails: Making sense of the ‘slippery slope’ to corporate fraud

Abstract

Management fraud is often explained through wealth-maximization paradigms. This article invokes a different approach, namely a behavioural one, and argues that fraud may happen as a consequence of failures in the decision-making process. Relying on extensive evidence in the case of Parmalat, it maintains that this fraud was not brought about by the desire of the CEO, chairman and founder to maximize his economic goals, but was rather a consequence of his failure to produce an objective description of reality. This was induced by a number of behavioural mechanisms such as self-deception, managerial hubris, emotions and the ‘endowment effect’. This article also contributes to a broader debate on the rationality of economic actors and its limits, and sheds light on the seeds of potential crises contained within genuine Schumpeterian entrepreneurs.