The Behavioural Finance Revolution
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The Behavioural Finance Revolution

A New Approach to Financial Policies and Regulations

Edited by Riccardo Viale, Shabnam Mousavi, Barbara Alemanni and Umberto Filotto

Financial markets are complex. Regulators strive to predict ways in which they can malfunction and create rules to prevent this from happening, yet behavioural impacts are often overlooked. This book explores how behavioural finance can go hand-in-hand with traditional methods to help banks and regulators create better policies. It also demonstrates how the behavioural finance revolution has opened the way to a more integrated approach to the analysis of economic phenomena.
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Chapter 2: Behavioral policymaking with bounded rationality

Shabnam Mousavi

Abstract

Behavioral policymaking views both policymakers and policytakers as boundedly rational agents who use heuristics. Therefore, understanding heuristic decision-making provides behavioral insights for the design and implementation of policies. Literature on bounded rationality in politics is closely connected to the study of heuristics in psychology, studied either in association with cognitive biases that limit the ability to fully account for information, or alternatively as simple but effective strategies in the absence of or without considering complete information. I argue that economists are now equal partners with psychologists in behavioral policymaking, provide a review of select work on the relationships between bounded rationality and political decision-making, and sketch some requirements for a theory of bounded rationality that can incorporate real-world irreducible uncertainty and the heuristic nature of decision-making. The future of macroeconomics – one that could effectively partner behavioral policymaking – emerges from platforms, such as BEFAIRLY, where academia interacts with government and industry.

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