Investor Psychology and the Financial Crisis
Posted: 21 May 2009
Date Written: May 21, 2009
Abstract
The financial crisis poses a challenge to orthodox theorists of markets and market participants. My talk will consider alternative views of how investors and markets behave. I consider the psychological dynamics implicated in the following questions: How do markets decide which financial products to develop and market? How do we understand the mindset of “rocket scientists” who create financial products? How do investors decide what financial products to buy and what price to pay? Whose assessments do they find it reasonable to rely on, and why? How would they articulate their strategy, and do they articulate it correctly? To what extent do investment bankers and lawyers feel the need to justify what they are doing in structuring and selling a financial instrument, or even to fully understand it? There are many interesting psychological dynamics involved. Many of these dynamics implicate our complex responses to uncertainty. Some may have evolutionary roots. We need to understand them far better to minimize the chance and severity of future crises.
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