Finance 180: Open Book Management

Hersh Shefrin
Spring Quarter 2015
Syllabus

Office Hours:
Office:
Telephone:
EMail:
Location of class:
Class meeting time:

Tu & Th, 3:00PM 4:00PM

Lucas Hall 321N
554-6893
hshefrin@scu.edu
Casa Italiana 7
TR 10:20AM 12:00PM

This course features four themes: (1) applying textbook corporate finance techniques to
running a company, with an emphasis on financial planning and analysis (FP&A); (2)
starting up a new company along open book lines; (3) behavioral debiasing; and (4)
learning about clean tech. In line with the course title, the overarching theme of the
course is instituting open book management practices. Open book management is an
approach to business, based on the idea that a firms financial statements should be
viewed as an open book within the organization, with corporate decisions being based on
value maximizing principles. In this sense, open book management is little more than the
application of the basic principles of corporate finance. However, putting these principles
into practice is a major challenge. The primary objective of this course is to teach
students how to develop a system for putting these principles into practice, and in so
doing, to mitigate behavioral biases.
Financial Management teaches students the traditional tools of corporate finance, based
on value maximizing principles. Behavioral Corporate Finance teaches students how
psychological obstacles introduce biases that prevent many, if not most, managers from
effectively implementing the principles taught in traditional corporate finance. This
course teaches students how to introduce procedures that mitigate behavioral biases, a
process technically known as debiasing.
Corporate culture is typically created from the top down. Instituting intelligent business
processes is one aspect of a strong culture. This course focuses on how to build
behaviorally intelligent organizations. In this sense, the course is not just about how to be
a good cog in the wheel, but about how to be a leader in building a really good wheel.
Prerequisites:
1. Finance 125 (Corporate Financial Policy)

Syllabus, March 25, 2015

2. You should also have a laptop computer that you can bring to class with you. The
class is structured around a simulation game that you will play in groups. Not
having a laptop computer presents a serious disadvantage, and in the past no
students have been able to complete the course successfully without having one.

Textbooks
Ending the Management Illusion (EMI)
The Great Game of Business (GGB) by Jack Stack with Bo Burlingham
Although the main text is EMI, the course will also draw heavily from GGB.

Simulation Game
The major vehicle for learning how to implement open book management is a simulation
game called EnviroStuff, which involves several files. The game files are in Excel, and
has two versions, a planning version and a play version. The planning version is designed
to provide students with opportunities to put the traditional tools of corporate finance into
practice. The play versions are designed to provide students with an opportunity to put
their plans into action and face the consequences of their decisions.
Students will assume the roles of managers responsible for sales and marketing,
operations, finance, and human resources. Along with instructions for playing the game,
the game files are available on CAMINO.
The objective for students in this game is to maximize wealth, a combination of their
financial stakes in the simulation firm, their stakes in the firm (for which they serve as
directors), and any executive compensation.
The simulation game is a competitive experience. Students will organize themselves into
groups, with each group running a simulation firm. Groups will compete against each
other in the market for alternative energy.
Unless you receive information to the contrary, simulation game bids are due by
11:59pm, Sunday for the weekend following the week number listed in the syllabus.

University Priorities
The course emphasizes two of themes associated with University priorities, the
environment and ethics. These themes are integral to the course. The simulation game
EnviroStuff is played against the background of managing a firm engaged in developing
new environmental technology or clean tech.

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Several years ago, venture capitalists began to pursue investments in alternative energies
as intensively as they pursued Internet technology investments during the 1990s. An
interesting article documenting the trend is the August 2006 issue of Bloomberg
magazine. Consequently, the environmental emphasis in the course will address
environmental issues in a way that is natural for a business school course as well as of
current interest. The Khosla Ventures website http://www.khoslaventures.com is a good
resource.
Ethical issues permeate the course, from the misrepresentation of information in financial
statements to the failure to deliver on promises about product quality. An interactive case
study is used to highlight some of these issues.

Learning Objectives for the Course

Learning Objectives
Develop forecasts of future financial
statements
Compute discretionary financing needed
Use financial ratios to articulate standards
Identify key financial ratios
Identify the key principles associated with
compensation policy
Link compensation system to value
maximization
Develop open book communication processes
Develop action plan based on information
communicated in huddle
Explain role of stock and stock options in
compensation policy

Syllabus, March 25, 2015

Assignment Mapping
In-class discussions
Simulation game
Exam Problems
In-class discussions
Simulation game
Exam Problems
In-class discussions
Simulation game
Exam Problems

In-class discussions
Simulation game
Exam Problems
In-class discussions
Simulation game
Exam Problems

Grading
Behavioral questionnaire assignment: 10%
Group term paper/simulation games/peer evaluation: 35%
Midterm exam: 20%
Final exam: 35%
Your grade will be determined on the basis of your performance as a group, your
individual performance on the midterm and final exam, and information from peer
evaluations conducted at the end of the course. You want to be sure that you are a full
participant in your groups activities and that there are no free riders. Attending
group meetings, but only as a passive listener, does not qualify anyone to be an active
participant. Being a free rider can result in a very low grade, including F.
Note: The behavioral questionnaire assignment is very important. Do not rush through it.
Read the instructions carefully, FOLLOW THEM, think about your answers first, and
then record them in the RIGHT cells. You would be well advised to complete this
exercise over several days.
Note: There is a possibility that the midterm and final exam will be combined into a
single exam to take place during Week 9. Otherwise, the midterm exam will take place
during Week 5 and the final exam will take place during exam week.
The inputs used to assess your group performance consist of your success in playing the
simulation game EnviroStuff, the group files you submit through drop boxes, and a term
paper that is due by 11:59pm the Sunday before your final exam. You will also fill out
peer evaluation forms which evaluate the performance of other group members. The peer
evaluation forms determine the extent to which the group portion of the grade applies to
individual members.

Term Paper
The paper should be no longer than 30 double spaced pages, and describe the three main
lessons your group learned in the course. Your group should keep a log of your
interactions during the exercises, and especially during your play of the simulation
games. Your log can provide documentation. Part of your paper can also be devoted to a
description of how the key elements of the course apply to organizations for which you
work or have worked for in the past. Part of the simulation exercise will involve casting
your simulation game play into a clean tech context.

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Below is a suggested outline for the topics you might wish to address in your paper.

the three main lessons your group learned in the course

a description of your play of the game, year-by-year, organized by standards,
planning, incentives, and information sharing
a breakdown of your financial position as managers at the end of Year 4,
where your position consists of the cumulative value of your prior salaries and
bonuses, expected future salaries and bonuses over the 5-year planning
horizon after Year 4, and current value of your equity holdings in your
company
behavioral issues you encountered in your play of the game: see checklist, p.
300 of EMI
(optional) how the key elements of the course apply to organizations for
which you work or have worked for in the past.

Websites for OBM, FP&A

There are some good websites for learning about open book management.
The website for Inc magazine is excellent. Go to
http://www.inc.com/guides/hr/23178.html
The Great Game of Business site has information that ties to one of the main books we
use in the course, The Great Game of Business by Jack Stack with Bo Burlingham. Go to
http://www.greatgame.com/ and check the information on the National Gathering of
Games.
For FP&A, a good website to provide an overview is
http://www.mondaq.com/x/166862/Outsourcing/Financial+Planning+Analysis+The+Nex
t+Frontier+Of+Business+Process+Outsourcing and a good website for paying
subscribers is http://www.apqc.org/knowledge-base/collections/financial-planning-andanalysis-best-practices-align-growth-strategy.

Expectations
The workload for this course is heavy. Playing the simulation game well can take a lot of
time. Some past students have indicated that playing the game can be like having a job.
Students need to be proficient in Excel. Every group should have at least one person with
Excel expertise.

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Getting behind in this course is very dangerous. The course builds skill upon skill. Once
behind, catching up is a challenge.
The learning objectives in the course pertain to skill acquisition. Students who keep up,
and whose groups keep up, will develop their skills and have fun in the process. In the
past students who have fallen behind experienced difficulty in developing their skills, and
instead of having fun, were instead stressed most of the time.

New Course Materials

Spring 2015 is the sixth time I am teaching Finance 180 since EMI was published. Many
of the teaching materials, exercises, and assignments are still in the process of
development. There may be a few bugs I missed and a lack of clarity in some issues, etc.
Please expect a few rough edges. We will work around these.

Prerecorded Lectures
Please be aware that as your instructor I will not be able to present some lectures in
person. For these lectures I will prepare the lecture material in advance. I will announce
the time and venue for prerecording lectures, and invite students who wish to attend these
sessions. Media Services will broadcast the recorded lectures during the regularly
scheduled class times.
Dates of lecture(s) that will be prerecorded: Lecture for May 19 will most likely be
recorded on Friday, May 15. Students wishing to attend the recording sessions at Media
Services in the Learning Commons are more than welcome. Dates and times will be
announced in class.

Guest Speakers
We will have guest speakers during the course, to speak on topics related to key themes
in the course.
May 26: Chris DiGiorgio, retired from Accenture, to speak about his report describing
the state of venture capital in Silicon Valley.

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Weblinks to Videoclips
Around Week 8, after you have become accustomed to practicing open book
management, we will view videoclips of examples from companies that apply open book
principles. I will post these links in a separate file on Camino.

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Schedule of Topics
The schedule of topics covered in the course appears below. The schedule is laid out
pretty tightly, and I will try to stick to it to the extent possible. Note that Accordant will
be used throughout the course to record lectures, which will be posted on CAMINO.
Please look to see what material will be discussed during any week, and read this
material in advance. In addition, download any relevant PowerPoint files.

Legend
Week 1 Mar 30
Week 2 Apr 6
Week 3 Apr 13
Week 4 Apr 20
Week 5 Apr 27
Week 6 May 4
Week 7 May 11
Week 8 May 18
Week 9 May 25
Week 10 June 1
Final Exam -- 6/9/2015, Tuesday, 9:10AM - 12:10PM in Casa Italiana 7.

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Flow of Course
Week 1 introduction and mechanics of game planning file.
Week 2 continued discussion of planning file mechanics, inputting decisions, preparing
financial statements, financial statement cash flow exercise.
Week 3 continue preparing financial statements in planning file, begin preparation of
first mock bid.
Week 4 Develop a mock bid for Year 1, pro forma planning, review of capital structure.
Week 5 Startup valuation analysis, develop a mock bid 2 for Year 2 by the end of the
week, midterm exam.
Week 6 capital budgeting, valuation, psychological biases, bid for Year 1 at end of
week.
Week 7 incentives, bounded rationality, heuristics, bid for Year 2 at end of week.
Week 8 information sharing and integration, guest speaker, bid for Year 3 at end of
week.
Week 9 good and bad practice companies, bid for Year 4 at end of week.
Week 10 wrapup, work on final paper, group presentation, bid for Year 5 at end of
week.

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Course Detail
Week 1 introduction and mechanics of game planning file, inputting decisions.
The first lecture of the week provides a general introduction to the course, with a focus
on the syllabus and the planning file.

In the second lecture of Week 1, we will begin working with the planning version of the
simulation game Envirostuff. Download this file from the course website onto your
laptop and bring your laptop with you to class.
The main task during this lecture is for you to be inputting the decisions described in
Chapter 4 of EMI into the planning file for EnviroStuff.
----------------------------------------Assignment due at end of Week 1: By the end of Friday, Week 1, complete and submit
the behavioral questionnaire. There is a single Excel answer template to record your
answers, after which you should post your answer file to a Dropbox on the course
Camino website in the Assignments section.

-----------------------------------------

Assignment due first class of Week 2: After completing the behavioral questionnaire
assignment due at the end of Week 1, read Chapter 4 of EMI, concentrating on pages
105-119, with special attention to pages 116-119. Then use the income statement and
balance sheet information in the file Assignment Week 2 Answer Template.xls to prepare
the statement of cash flows. There is a template for your answer in the file itself. Print out
your answers on a hard copy, with your name, and turn in the exercise during Week 2
when your instructor asks.
Note: There are some typographical errors in EMI. Those I know about are listed in the
file Errors in EMI January 2011.doc. Pencil the corrections into your text so that you
dont get confused later.
The assignment will serve to: (1) provide more detail about the structure of the simulation
game EnviroStuff; and (2) provide you with an opportunity to review basic financial
statements.
A key premise of the course is that a psychologically smart company takes steps to
ensure that it has a workforce which is accounting and financially literate. For this reason,
it is critical that the entire class be on the same page when it comes to basic financial

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statements, and the financial statement exercises we do in the first few weeks are
designed with this point in mind.
During Week 2, we discuss the preparation of basic financial statements, a task that will
loom large in your play of EnviroStuff.
-------------------------------------------

Reading for end of Week 1:

Once you have completed Assignment 1, and before the second class of Week 2,
read Chapter 1 of EMI. Chapter 1 of EMI introduces key behavioral biases,
provides a series of examples, and introduces the concept of debiasing. The end of
Chapter 1 identifies four key concepts that constitute the pillars of this course:
accounting based standards, planning, incentives, and information sharing.
After reading Chapter 1 of EMI, read Chapter 4 of EMI, paying special attention
to pages 116-119. Chapter 4 of EMI relates to the financial statement preparation
assignment that is due at the beginning of Week 2.

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Week 2 continue mechanics of game planning file, inputting decisions, financial

statement cash flow exercise, preparing financial statements.

The focus of the week is the development of financial statements in the planning and
game files for EnviroStuff. You can find a description of the planning file for EnviroStuff
on pages 286-297 in Chapter 8 of EMI. The financial statements for this exercise are
approximately the same as those presented in Chapter 4 of EMI. The challenge in this
part of the exercise is to link the financial statement values to other entries in the
EnviroStuff planning game file, thereby reflecting the importance of internal controls.
Warning!!! Be sure to concentrate on this exercise, so that faulty financial statements do
not come back to haunt you when you play the simulation game later in the course.
After the second class of Week 2, you should self-select into groups of either 4 or 5.
If people drop the course along the way, we might have to reconfigure groups.

Reading for end of Week 2: At the end of Week 2, read pages 155-183 of Chapter 5 of
EMI, and pages 286-297 of Chapter 8 of EMI.

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Week 3 continue preparing financial statements in planning file, begin preparation of

first mock bid.
The discussion in Week 3 ties up loose ends from Week 2 and focuses on financial
planning. Remember to bring your laptops with you to class.
Once you have completed your planning file exercise, discussion moves to the
preparation of the first mock bid.
The mock bid focuses on decision making. Class discussion will focus on heuristic-based
decisions, the use of marginal analysis, assessment of production efficiencies, treatment
of sales and marketing information, etc.
The mock bid also entails the use of the Envirostuff game file in conjunction with the
Envirostuff planning file. Communication between the two files entails the use of a
special Excel copy A: to B procedure, to be described in class. The first mock bid is
due at end of Week 4, and the second mock bid is due at end of Week 5. Class time is
used to prepare bids.
Assignment beginning at the end of Week 3: Complete the following exercise before
the first class of Week 4. The objective of this assignment is to help you develop the
mechanics of pro forma financial planning, and it builds on the reading assignment from
the end of Week 2. Note: This is a self-correcting assignment, not a turn-in assignment.
The steps for completing the exercise are as follows:

Read Chapter 5 of EMI.

Download the file Pro Forma Generator.xls.
Familiarize yourself with the structure of the file. The inputs for the file
have been constructed to generate the financial statements for Years 0, 1,
and 2 (2010, 2011, and 2012) in Chapters 4, 5 of EMI. The financial
statements appear in the tab Pro Forma Generator of the file.
Within your groups, and in your business function roles, you will be
taking responsibility for particular forecasting inputs for Years 3 (if
incomplete), 4 and 5. Your objective is to prepare a complete forecast for
the income statement and balance sheet for these years.

Reading for end of Week 3: At the end of Week 3, read:

Pages 58-65 of Chapter 2 of EMI
pages 184-193 of Chapter 5 of EMI

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Week 4 Develop a mock bid for Year 1, pro forma planning, review of capital
structure.

Assignment to be completed by the end of Week 4: Complete exercise using Pro

Forma Generator.xls to prepare a forecast through the end of Year 5.

Assignment to be completed before Week 5: Within your group roles as managers

responsible for marketing, production, finance, and CEO, use Pro Forma Generator.xls
to prepare a pro forma forecast for your own game, from Year 0 through Year 2. To do
this, replace the input values in the file Pro Forma Generator.xls with your own inputs.

Assignment to be completed before Week 5: Prepare a mock bid, to be submitted by

11:59pm on the Sunday marking the end of Week 4.

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Week 5 Startup valuation analysis, develop a mock bid 2 for Year 2 by the end of the
week, midterm exam#1 during last class of week.

Assignment to be completed before Week 6: Prepare a second mock bid, to be

submitted by 11:59pm on the Sunday marking the end of Week 5.

Reading for end of Week 5: At the end of Week 5, read:

Chapters 1-5 of GGB

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Week 6 capital budgeting, valuation, psychological biases.

Before the first lecture of the week, examine the tabs relating to capital budgeting in your
Pro Forma Generator file, and bring your laptop with you to class.
Introductory Exercise on Capital Budgeting: Consider the capital expenditures made
in the textbook example of EnviroStuff at the end of Year 1. Together with your group,
use the file Capital Budgeting Template.xls to develop incremental cash flow forecasts
for these expenditures. You have the Year 2 plan (from Chapter 5) which provides you
with some guidance, but this is largely a judgmental exercise whose objective is to help
you develop group mechanics for doing capital budgeting analysis.

Your CEO should lead the discussion, assigning responsibility for line items to
other group members.
When you do the exercise, keep in mind that the cash flows you enter in the
capital budgeting template are incremental.
The status quo is that you reject the project. What incremental cash flows
represent are the amount by which the firms overall cash flows will change
because you accept the project.

Planning Component of Your Year 1 Bid: Using the pro forma generator file, develop
pro forma financial statements for Years 1-5. In addition, develop a capital budgeting
analysis for your Year 0 Capex decisions. You should begin a log of your group
discussions, to provide you with material for your group paper. In your group
discussions, try to use Table 8.1 from EMI. Because there are many psychological biases,
you might want to concentrate on just four excessive optimism, overconfidence,
aversion to a sure loss, and confirmation bias and to note in which processes these
biases come into play. Because there are four processes standards, planning, incentives,
and information sharing your analysis will be 4x4.

Reading for end of Week 6: At the end of Week 6, read:

Chapters 2, 6 of EMI
Chapters 6, 7, 8 of GGB

Assignment to be completed before Week 6: The game begins for real at the end of
Week 6, with the first bid due by midnight Sunday, end of Week 6. Prepare your
EnviroStuff bid for Year 1. You will be submitting your game file, your planning file,
and your pro forma generator file. Note: When you submit your game file, please submit
it under the name GroupX.xls, where X is your group number. Leave no spaces or dashes
between the p and the X. Also, submit the file as an xls file, not an xlsx file.
In your role assignments, you will have a permanent role and a rotating role. In your
rotating roles, you should rotate through a different function every week. This way,
everyone has an opportunity to participate in each business function.

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Week 7 incentives, bounded rationality, heuristics.

The lectures for this week cover the structuring of incentive plans, and the psychological
phenomena associated with business decision making.
Exercise to Develop Incentive Plan: Identify variables that would serve as performance
measures. Select variables with the idea that when you play EnviroStuff, managers can be
rewarded for hitting their targets or penalized for missing their targets. Establish an
incentive plan for your firm, with rewards being based on the associated standards.

Assignment to be completed before Week 8: Prepare your EnviroStuff bid for Year 2.
You will be submitting your game file, your planning file, and your pro forma file. Note:
When you submit your game file, please submit it under the name GroupX.xls, where X
is your group number. Leave no spaces or dashes between the p and the X. Also,
submit the file as an xls file, not an xlsx file.

Reading for end of Week 7: At the end of Week 7, read:

Chapter 9 of GGB

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Week 8 information sharing and integration.

In addition to lecture material based on the reading assignment for the end of Week 7, we
will view media clips based on GGB.

Guest speaker: Chris DiGiorgio, retired from Accenture, venture capital in Silicon
Valley.

Assignment to be completed before Week 9: Prepare your EnviroStuff bid for Year 3.
You will be submitting your game file, your planning file, and your pro forma file. Note:
When you submit your game file, please submit it under the name GroupX.xls, where X
is your group number. Leave no spaces or dashes between the p and the X. Also,
submit the file as an xls file, not an xlsx file.

Reading for end of Week 8: At the end of Week 8, read:

Chapters 3, 7, 8 of EMI
BPs Failure to Debias: Underscoring the Importance of Behavioral Corporate
Finance

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Week 9 good and bad practice companies.

Midterm exam #2 during last class of week.

In Week 9, depending on time, we might discuss ethics, using an interactive case study. If
so, download the handout from the website, but do not read it until we do the class
exercise. The exercise will feature your instructor presenting a short case involving one
of the companies discussed in EMI. The case will conclude with a short list of questions.
You will break up into discussion groups to address these questions, after which we will
share responses.
We will also leave a little time for you to work on preparing your next bid. Do your
detailed pro forma analysis.

Assignment to be completed before Week 9: Prepare your EnviroStuff bid for Year 4.
You will be submitting your game file, your planning file, and your pro forma file. Note:
When you submit your game file, please submit it under the name GroupX.xls, where X
is your group number. Leave no spaces or dashes between the p and the X. Also,
submit the file as an xls file, not an xlsx file.

Reading for end of Week 9: At the end of Week 9, read:

How Psychological Pitfalls Generated the Global Financial Crisis

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Week 10 wrapup, work on final paper, group presentation on last day, Year 5 bid.

Wrap up discussion.
Group presentations on play of game.

We will also leave a little time for you to work on preparing your 5 year pro forma, as
well as your final group paper.

Assignment to be completed before end of Week 10: Prepare your EnviroStuff bid for
Year 5. You will be submitting your game file, your planning file, and your pro forma
file. Note: When you submit your game file, please submit it under the name GroupX.xls,
where X is your group number. Leave no spaces or dashes between the p and the X.
Also, submit the file as an xls file, not an xlsx file.

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