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Financial Markets and Financial Regulation

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What does Behavioral Finance (BF) have to offer in a debate where the main topic is "Financial Markets" and "Financial Regulations"? Focus both on the micro (individual) behavior and the macro (system-wide/economy-wide) behavior.

A. In favor of the part that favors regulation of financial markets.
B. In opposition to the part that opposes regulation of financial markets.
C. In conclusion - a summary of the key learning points as explained in parts A and B above.

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Solution Summary

The response provides you a structured explanation of Behavioral Finance. It also gives you the relevant references.

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Part A:
There is strong argument from behavioral finance that there should be regulation of the financial markets. For example, there is a need for regulating derivatives and very high penalty fees for late payment of credit card bills. In fact deregulation is blamed for redistribution of wealth in favor of the wealthy. Regulation of the financial markets by financial institutions, central bank policy, fiscal policy, and banking regulation, is essential for a healthy economy. Consider the example of a person who has defaulted in paying his credit card bills. If the individual is overwhelmed by the high charges levied on him the person cannot repay his debt and may be forced into bankruptcy. This is the situation that is best avoided. Ineffective regulation by the Housing and Urban Development and Department of Treasury is blamed for the housing bubble. From the perspective of regulation, if there is a unified policy all financial regulation can be managed under a single framework. If there is centralized regulation of the financial markets there will be no gaps in coverage or areas of law enforcement. In fact, the lack of regulation or "de-regulation" is blamed for ...

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  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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