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 7: Behavioral re-evolution: how behavioral economics has evolved and is evolving

Enrico Maria Cervellati

Abstract

This chapter presents a personal (thus biased) view of the evolution of behavioral economics, which the author believes constitutes a revolution in economics or, better, a re-evolution of economics, since economics is behavioral in nature, it was behavioral at its outset, and finally returned to being behavioral. The chapter claims that most classical economists were behavioral economists since they considered psychology and sociology in their studies. While Simon’s idea of limited rationality anticipated behavioral economics, the work of Kahneman and Tversky and of the first modern behavioral economists such as Thaler, Shiller, Shefrin and Statman, among others, can be considered the first generation of behavioral studies. In recent years, behavioral economists went ‘in action’, suggesting solutions to biases or how to exploit them to the benefit of people. It is now time for a third generation of ‘personalized’ behavioral economics that accounts for individual personalities.

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