Psychological Bias as a Driver of Financial Regulation

European Financial Management Journal, Forthcoming

36 Pages Posted: 3 Oct 2007 Last revised: 13 Dec 2008

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Date Written: October 2, 2007

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.

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

JEL Classification: G18, H10

Suggested Citation

Hirshleifer, David A., Psychological Bias as a Driver of Financial Regulation (October 2, 2007). European Financial Management Journal, Forthcoming . Available at SSRN: https://ssrn.com/abstract=1018820 or http://dx.doi.org/10.2139/ssrn.1018820

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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