Prediction tools: Financial market regulation, politics and psychology
Abstract
Risk managers operate in the space of risk and returns, constrained by financial market regulations. How can risk managers assess risk associated with changing regulatory structures, given that theories about the relationship between risk and return are much more developed than theories about the determinants of regulatory constraints? To help risk managers develop insight and predictive ability about the evolution of financial market regulations, the authors present a systematic framework to analyse how financial market regulation in the USA has developed in response to the global financial crisis. The framework combines elements from game theory, political science, the economics of regulation and behavioral finance. Notably, the model’s prediction for the legislation that came to be named the Dodd–Frank Act turned out to be highly accurate.
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Author's Biography
Shabnam Mousavi focuses her research on actual decision processes of daily and professional choice situations. Her two PhDs in economics and statistics, and a post-doctorate in finance are from Virginia Polytechnic Institute. Since 2006, Shabnam has been a fellow of the Max Planck Institute for Human Development, Berlin and is currently a Visiting Assistant Professor in the Finance Department of the Robinson College of Business at Georgia State University. She was previously on the Faculty of Statistics at Penn State University. Shabnam’ work has appeared in Behavioral and Brain Sciences, Journal of Economics Methodology, Journal of Quality Engineering and Quality Technology. She has received a grant for a research programme in the Defining Wisdom Project at the University of Chicago.
Hersh Shefrin has worked in the field of behavioural finance since its inception. His book ‘Beyond Greed and Fear; Understanding Behavioral Finance and the Psychology of Investing’ (2009, Harvard Business School Press), provided the first integrative, comprehensive treatment of the subject. In the last five years Hersh has published an edited collection entitled ‘Behavioralizing Finance’ in Foundations and Trends in Finance (2009, Vol. 4, Nos 1–2), and two books: ‘A Behavioral Approach to Asset Pricing’, second edition (2008, Academic Press/Elsevier) and ‘Behavioral Corporate Finance’ (2007, McGraw Hill/Irwin). Taken together, these new works span the major directions in behavioural finance research. He is frequently quoted in the press on financial matters (Wall Street Journal, New York Times, Financial Times, Times of London, Fortune, Forbes and BusinessWeek), Hersh holds the Mario L. Belotti Chair in Finance at Santa Clara University.
Citation
Mousavi, Shabnam and Shefrin, Hersh (2010, September 1). Prediction tools: Financial market regulation, politics and psychology. In the Journal of Risk Management in Financial Institutions, Volume 3, Issue 4. https://doi.org/10.69554/HQHZ4594.
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