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Psychological Bias as a Driver of Financial Regulation

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  • Hirshleifer, David

Abstract

I propose here the psychological attraction theory of financial regulation—that regulation is the result of psychological biases on the part of political participants—voters, politicians, bureaucrats, and media commentators; and of regulatory ideologies that exploit these biases. Some key elements of the psychological attraction approach are: salience and vividness, omission bias, scapegoating and xenophobia, fairness and reciprocity norms, overconfidence, and mood effects. This approach further emphasizes emergent effects that arise from the interactions of individuals with psychological biases. For example, availability cascades and ideological replicators have powerful effects on regulatory outcomes.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5129.

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Date of creation: 02 Oct 2007
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Handle: RePEc:pra:mprapa:5129

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Keywords: Investor psychology; regulation; salience; omission bias; scapegoating; xenophobia; fairness; reciprocity; norms; mood; availability cascades; overconfidence; evolutionary psychology; memes; ideology; replicators;

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Cited by:
  1. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
  2. Hirshleifer, David & Teoh, Siew Hong, 2009. "The Psychological Attraction Approach to Accounting and Disclosure Policy," MPRA Paper 14046, University Library of Munich, Germany.
  3. Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas D., 2008. "The Effects of Mandated Financial Counseling on Household Mortgage Decisions: Evidence from a Natural Experiment," Working Paper Series 2008-20, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  4. Gérard Charreaux, 2009. "Droit et gouvernance:l’apport du courant comportemental," Working Papers FARGO 1091001, Université de Bourgogne - Crego EA 7317/Fargo (Research center in Finance,organizational ARchitecture and GOvernance).
  5. Gehring, Kai, 2012. "Benefit or burden? Unraveling the effect of economic freedom on subjective well-being," Working Papers 0531, University of Heidelberg, Department of Economics.
  6. Nofsinger, John R., 2012. "Household behavior and boom/bust cycles," Journal of Financial Stability, Elsevier, vol. 8(3), pages 161-173.

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