Inviting both Amos Tversky and Solomon Asch: It’s not all Casino Capitalism (original) (raw)
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A BEHAVIORAL APPROACH TO THE GLOBAL FINANCIAL CRISIS
2011
The purpose of this paper is to reflect the behavioral biases that led to this global financial crisis. The paper presents briefly the real causes of the crisis (structural and cyclical factors) and puts a greater accent on the behavioral factors. The authors considered to structure the paper in three main pillars: behavioral factors, the collapse of ethical behavior and the role of behavioral finance in studying, regulating and assessment financial risks. The first pillar consists in a brief presentation of the behavioral factors such as: optimism and wishful thinking, overconfidence, greed, regret, pessimism, passing the responsibility, herding -groupthink, anchoring, representativeness biases, informational cascades and "this time is different" syndrome. The second pillar of the paper presents the collapse of ethical behavior that led to the global financial crisis: predatory lending practices, inappropriate compensation schemes, rating agencies behavior, corporate governance reforms and financial institutions opacity in their reporting. The third pillar presents the mismanagement of risk and regulations that led us into this global mess. The paper concludes with the need of integrating biases of human behavior into regulations in order to make them more effective and people become less financially vulnerable.
11.How can behavioural finance help us in better understanding the recent global financial crisis
The recent global financial crisis calls for a need to adopt a more interdisciplinary approach to the study of economics and finance by focussing also on the individual and social psychology that drives the actions of market participants. Behavioural finance offers such a perspective by drawing on the fields of psychology and the other social sciences to explain how investors are led to make less than rational investment decisions and how these could aggregate to less than rational market outcomes, like periods of excessive investor euphoria preceding a financial crisis. This paper draws on the existing literature in behavioural finance and particularly on the two models of "information cascade" by Bikchandani et al. (1992) and "limits to arbitrage" by De to provide a better understanding of the underlying reasons behind the recent global financial crisis. The paper concludes with a view to inform policy of the ways it can curb speculative excesses and prevent events like the recent global financial crisis.
Behavioral economics and the related field behavioral finance deals with how the psychological, social, cognitive and emotional factors affect the economical decision making of the individuals and also the institutions, and the reflection of these onto the financial outcomes such as the market prices, returns, and the resource allocation (Cmerer et. al., 2011). At that point, it can definitely be said that the major effect of the psychological, social and emotional factors that are engaged in any human behavior is to corrupt the rational decision making mechanism of the individuals and cause them to act irrationally. In the major studies related to the field, the three concepts that guides behavioral finance and that leads to the irrational behavior can be described as heuristics, framing and the market inefficiencies
British Journal of Psychotherapy, 2013
In the Preface of David Tuckett's book, Minding the Markets, he asks the question, can the financial crisis of 2008 be attributed to 'greed, corruption, trade imbalances, regulatory laxity and panic'? He believes that none of those descriptions can offer a satisfactory explanation because what has been left out is any understanding of the role that emotions play in all human behaviour. With that thought in mind he sets out to explore the way in which a psychoanalytic understanding might bring about change in the way the money markets could regulate themselves. Tuckett draws upon interviews that he conducted during 2007 with asset managers around the globe. He brings this evidence to bear upon his thesis that unregulated financial trading brings in its wake emotional states of mind in the asset managers that are not conducive to prudential financial behaviour. Tuckett introduces three psychological concepts, taken from Klein and Bion, the 'phantastic object', 'groupfeel' and the 'divided state'. The 'phantastic object' is a mental representation of a much desired object, initially the mother and the mother's body. The 'divided state' derives from the Kleinian model of the earliest mental state of the infant in which there is a representation of the good mother who feeds it and the bad mother who frustrates it, or the paranoidschizoid position. 'Groupfeel' is taken from Bion's theory about work groups and basic assumption groups in which the individual fears being questioned or criticized by the group. To take an example from the tulip bulb frenzy in the 17th century; there is an excited desire for the tulip bulb which excludes any criticism of its real value and so desire becomes a 'phantastic object' that must be possessed. The desire is augmented by a 'groupfeel', an enormous group pressure to buy this 'phantastic object'. In reality the emotional desire for the Tulip Bulb has little to do with value, for the asset managers are operating with a 'divided state' of mind, in which doubts about the worth of the asset are dismissed and replaced with an omnipotent belief that this 'phantastic object' will make everyone rich. On this account it makes sense to suggest that the financial managers are working in a 'divided state' of mind in which integrated thinking about the nature of the object of desire is denied. Tuckett offers a critique of standard economic theory and behavioural economics. Their models assume that man behaves rationally and that the risk and reward for holding an asset are reflected in its price. However, neither model can explain why banks were prepared to take on enormous mortgage debts when it is known that property prices are inherently unstable. The conclusion must be that there was a collective madness in the financial markets in which the rewards of risk-taking over potential losses dominated.
Psychology of investors: reexamination of the traditional finance
CERN European Organization for Nuclear Research - Zenodo, 2022
Traditional finance and behavioral finance are two branches of finance, dealing differently with the decision-making choices of stock brokers, whether on the financial markets or in the company of which they are shareholders. The traditional approach is based on the hypothesis of the efficiency of financial markets and the perfect rationality of the stock market, on the other hand, the behavioral one takes into consideration the impact of cognitive bias and emotional bias on the decision-making process. Rationality and irrationality are two explainable concepts of the decision-making of the drone operators. According to the traditional, stock brokers are "rational" since they allow the price of a share to be linked with its fundamental value and the cancellation of any divergence through arbitration. However, behaviorists describe drone operators as "irrational" because they are humans, driven by emotions and judgment heuristics that interfere with their rational behavior and investment decisions. The purpose of this article is first to clarify the basic foundations of each reasoning, so that we can know whether behavioral finance actually offers remedies for a good understanding of the behaviors of drones.
HUMAN SOCIETY AND FINANCIAL BEHAVIOUR
Strategica International Academic Conference, 2018
The basic expression of today's decision base in any banking institution or asset management company is risk management. Nothing new would say, its risk and profound implications have been the subject of study since the beginning of the last century when Knight, von Neumann, Morgenstern, or Arrow prefetted this field. And yet, why today, more than ever, does everything go from interpreting it in a way that becomes almost obsessive? Often invoked risk management motivation leads us into a banking system that fails to credit the economy, companies have increasingly difficult access to finance, whole sectors suffer, large companies collapse. The question that is naturally born is what has changed in the interpretation of risk in recent years? Can we talk about a subjective element that defines the risk? Referring to modern times, we notice that the barrier that delimits this change of paradigm is 2008, a time that has fundamentally transformed the approach of risk, not necessarily its quantification. This is why we need to address the risk through human behavior with its subjective valences and its implications for decision-makers.