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How Psychological Pitfalls Generated the Global Financial Crisis

VOICES OF WISDOM: UNDERSTANDING THE GLOBAL FINANCIAL CRISIS, Laurence B. Siegel, ed., Research Foundation of CFA Institute, 2010

SCU Leavey School of Business Research Paper No. 10-04

44 Pages Posted: 18 Dec 2009  

Hersh Shefrin

Santa Clara University - Leavey School of Business

Date Written: December 15, 2009

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.

Keywords: Financial Crisis, Behavioral Finance, Government Regulation

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

Suggested Citation

Shefrin, Hersh, How Psychological Pitfalls Generated the Global Financial Crisis (December 15, 2009). VOICES OF WISDOM: UNDERSTANDING THE GLOBAL FINANCIAL CRISIS, Laurence B. Siegel, ed., Research Foundation of CFA Institute, 2010; SCU Leavey School of Business Research Paper No. 10-04. Available at SSRN: https://ssrn.com/abstract=1523931 or http://dx.doi.org/10.2139/ssrn.1523931

Hersh Shefrin (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)

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