Regulating Financial Markets: Protecting Us from Ourselves and Others

29 Pages Posted: 29 Jan 2009

See all articles by Meir Statman

Meir Statman

Santa Clara University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 28, 2009

Abstract

The global financial and economic crisis of the late 2000s highlights the ongoing tug-of-war between those who pull toward free markets and those who pull toward strict regulation of markets. It also highlights the sometimes parallel and sometimes perpendicular tug-of-war between those who pull toward libertarianism and those who pull toward paternalism. Rising stock markets and economic prosperity add power to those who pull toward free markets and libertarianism, and stock market crashes and economic recessions add power to those who pull toward strict regulation and paternalism. I discuss the crisis of the late 2000s against the backdrop of earlier crises with special focus on margin regulations which limit leverage, suitability regulations which require providers of financial products to act in the interests of their clients, Blue Sky laws which prohibit securities deemed overly risky or unfair, and mandatory disclosure regulations which require providers of financial products to disclose pertinent information even if potential buyers do not ask for it.

Keywords: regulation, behavioral finance, paternalism, libertarianism, suitability, blue sky, mandatory disclosure, margin, leverage, cognitive errors, emotions

JEL Classification: G21, G22, G23, G24, G28

Suggested Citation

Statman, Meir, Regulating Financial Markets: Protecting Us from Ourselves and Others (January 28, 2009). Available at SSRN: https://ssrn.com/abstract=1334242 or http://dx.doi.org/10.2139/ssrn.1334242

Meir Statman (Contact Author)

Santa Clara University - Department of Finance ( email )

500 El Camino Real
Santa Clara, CA 95053
United States
408-554-4147 (Phone)
408-554-4029 (Fax)

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