Disentangling the Epistemic Failings of the 2008 Financial Crisis

Warenski, L. 2018. "Disentangling the Epistemic Failings of the 2008 Financial Crisis." in D. Coady and J. Chase (eds), The Routledge Handbook of Applied Epistemology. Abingdon and New York: Routledge.

28 Pages Posted: 8 Mar 2020

Date Written: June 26, 2018

Abstract

I argue that epistemic failings are a significant and underappreciated moral hazard in the financial services industry. I argue further that an analysis of these epistemic failings and their means of redress is best developed by identifying policies and procedures that are likely to facilitate good judgment. These policies and procedures are “best epistemic practices.” I explain how best epistemic practices support good reasoning, thereby facilitating accurate judgments about risk and reward.

Failures to promote and adhere to best epistemic practices contributed to the 2008 financial crisis. I identify and discuss some of the ways in which best epistemic practices were violated in the events that led to the crisis, with a focus on the role of the credit rating agencies. I go on to discuss some of the ways in which these failings have been redressed. Specifically, the 2006 Credit Rating Agency Reform Act, including its expansion by Dodd Frank, and the subsequent statutory regulation by the SEC aim to facilitate best epistemic practices. These regulatory reforms are examples of proactive and forward-looking regulation, although they were implemented retroactively in response to perceived failures of the rating agencies. I conclude by observing how proactive regulation for best epistemic practices might help us to anticipate and avoid future crises.

Keywords: Applied Epistemology, 2008 Financial Crisis, Risk Culture, Banking, Credit Rating Agencies

Suggested Citation

Warenski, Lisa, Disentangling the Epistemic Failings of the 2008 Financial Crisis (June 26, 2018). Warenski, L. 2018. "Disentangling the Epistemic Failings of the 2008 Financial Crisis." in D. Coady and J. Chase (eds), The Routledge Handbook of Applied Epistemology. Abingdon and New York: Routledge., Available at SSRN: https://ssrn.com/abstract=3535901

Lisa Warenski (Contact Author)

City University of New York ( email )

365 Fifth Avenue
New York,, NY 10016
United States
2128177000 (Phone)

HOME PAGE: http://lisawarenski.com/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
33
Abstract Views
458
PlumX Metrics