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Psychological Bias as a Driver of Financial Regulation

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  • David Hirshleifer

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 emphasises 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." Copyright (c) 2008 The Author Journal compilation (c) 2008 Blackwell Publishing Ltd.

Suggested Citation

  • David Hirshleifer, 2008. "Psychological Bias as a Driver of Financial Regulation," European Financial Management, European Financial Management Association, vol. 14(5), pages 856-874.
  • Handle: RePEc:bla:eufman:v:14:y:2008:i:5:p:856-874
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    Cited by:

    1. Degen, Kathrin & Fleisch, Elgar & Götte, Lorenz & Lalive, Rafael & Staake, Thorsten & Tasic, Vojkan & Tiefenbeck, Verena, 2016. "Overcoming Salience Bias: How Real-Time Feedback Fosters Resource Conservation," CEPR Discussion Papers 11480, C.E.P.R. Discussion Papers.
    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. Henke, Hans-Martin, 2016. "The effect of social screening on bond mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 69-84.
    4. Gehring, Kai, 2014. "Who Benefits from Economic Freedom? Unraveling the Effect of Economic Freedom on Subjective Well-Being," Working Papers 531, University of Heidelberg, Department of Economics.
    5. Gérard Charreaux, 2009. "Droit et gouvernance:l’apport du courant comportemental," Working Papers CREGO 1091001, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    6. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9142, University Library of Munich, Germany.
    7. Federico Favaretto & Donato Masciandaro, 2014. "Behavioral Economics and Monetary Policy," BAFFI CAREFIN Working Papers 1501, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    8. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.
    9. Nofsinger, John R., 2012. "Household behavior and boom/bust cycles," Journal of Financial Stability, Elsevier, vol. 8(3), pages 161-173.
    10. 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.
    11. Itzhak Ben-David & Sumit Agarwal & Gene Amromin & Souphala Chomsisengphet & Douglas D. Evanoff, 2011. "Does Mandatory Loan Review Affect Mortgage Contract Choice and Performance?," NFI Working Papers 2011-WP-12, Indiana State University, Scott College of Business, Networks Financial Institute.
    12. Beattie, Vivien & Fearnley, Stella & Hines, Tony, 2010. "Factors Affecting Audit Quality in the 2007 UK Regulatory Environment: Perceptions of Chief Financial Officers, Audit Committee Chairs and Audit Engagement Partners," SIRE Discussion Papers 2012-29, Scottish Institute for Research in Economics (SIRE).
    13. Francesc Trillas Jané, 2016. "Behavioral Regulatory Agencies," Working Papers wpdea1606, Department of Applied Economics at Universitat Autonoma of Barcelona.
    14. 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.
    15. Nofsinger, John & Varma, Abhishek, 2014. "Socially responsible funds and market crises," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 180-193.
    16. Lucia A. Reisch & Andreas Oehler, 2009. "Behavioral Economics: eine neue Grundlage für die Verbraucherpolitik?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 78(3), pages 30-43.
    17. Tasic Slavisa, 2011. "Are Regulators Rational?," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 17(1), pages 1-21, April.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • H0 - Public Economics - - General
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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