Prediction Tools: Financial Market Regulation, Politics & Psychology

17 Pages Posted: 3 Aug 2010

See all articles by Shabnam Mousavi

Shabnam Mousavi

Max Planck Institute for Human Development; Center for Adaptive Behavior and Cognition, Max Planck Institute for Human Development

Hersh Shefrin

Santa Clara University - Leavey School of Business

Date Written: July 21, 2010

Abstract

Risk managers operate in the space of risk and returns, constrained by financial market regulations. How can risk managers assess risk associated with changing regulatory structures, given that theories about the relationship between risk and return are much more developed than theories about the determinants of regulatory constraints? To help risk managers develop insight and predictive ability about the evolution of financial market regulations, we present a systematic framework to analyze how financial market regulation in the United States has developed in response to the global financial crisis. Our framework combines elements from game theory, political science, the economics of regulation, and behavioral finance. Notably, the model’s prediction for the legislation that came to be named the Dodd‐Frank Act turned out to be highly accurate.

Keywords: Regulation, game theory, behavioral finance, politics

JEL Classification: G00, G18, C70,

Suggested Citation

Mousavi, Shabnam and Shefrin, Hersh, Prediction Tools: Financial Market Regulation, Politics & Psychology (July 21, 2010). Available at SSRN: https://ssrn.com/abstract=1652264 or http://dx.doi.org/10.2139/ssrn.1652264

Shabnam Mousavi

Max Planck Institute for Human Development ( email )

Lentzeallee 94
Berlin, 14195
Germany

Center for Adaptive Behavior and Cognition, Max Planck Institute for Human Development ( email )

Lentzeallee 94
Berlin, 14195
Germany

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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