How Psychological Pitfalls Generated the Global Financial Crisis

Abstract:     
The root cause of the financial crisis that erupted in 2008 is psychological. In the events which led up to the crisis, heuristics, biases, and framing effects strongly influenced the judgments and decisions of financial firms, rating agencies, elected officials, government regulators, and institutional investors. Examples involving UBS, Merrill Lynch, Citigroup, Standard & Poor’s, the SEC, and end investors illustrate this point. Among the many lessons to be learned from the crisis is the importance of focusing on the behavioral aspects of organizational process.

Number of Pages in PDF File: 44

Keywords: Financial Crisis, Behavioral Finance, Government Regulation

JEL Classification: G00, G18, G28, G20, G38

working papers series