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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.

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, November.
    • Handle: RePEc:bla:eufman:v:14:y:2008:i:5:p:856-874
    DOI: 10.1111/j.1468-036X.2007.00437.x
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    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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