Monday, December 20, 2010

Biases, Scams and Regulation: Shiller Lecture

I posted before on the fact that Robert Shiller's undergraduate finance lectures at Yale are available to view on the web. I posted already on the behavioural finance lecture (lecture 7), which is obviously worth watching for most of the people who read this blog. Lecture 8 extends the study of heuristics and biases to examine their implications for fraud and regulation, and in general the implications for people's behaviour in financial markets. He covers various deviations from rationality such as wishful thinking, attention anomalies, anchoring, representativeness, gambling and quasi-magical thinking. These lead to market temptations including: overselling, hiding information and loyalty to friends with respect to channelling of investment opportunities of varying quality. The job of regulatory authorities is partly to prevent asset prices from being unduly influenced by the exploitation of these psychological biases and the temptation to capitalise on them, using mechanisms such as forced disclosure, ease of access to information, regular filing rules, accreditation, insider-trading rules, surveillance, accounting standards and deposit protection.

No comments: