Abstract:This paper begins the project of enriching the economic analysis of bankruptcy law through behavioral economics. Empirical research has consistently identified deviations from rationality in the subjects studied. One cannot mechanically attribute these to firms. Rather, firms may well be set up to counteract some, but not necessarily all, of the tendencies that researchers have discovered. For example, the internal divisions and practices of banks can be explained as an attempt to repair cognitive bias. Thus, banks may be more rational in their lending and workout decisions than a single individual would be.