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 9: Recent advances in behavioural macroeconomics and lessons for policymakers

Giordano Zevi

Abstract

The Great Recession has led to much macroeconomic soul-searching. Before the downturn, policymakers did not rely on behavioural theories as they were not considered comprehensive enough to form a coherent alternative system to mainstream models based on economic agents’ full rationality. Now, these theories, including those generally referred to as nudging, have also become fashionable for policymaking. Enrichments of the set of policy tools have followed different patterns. We identify three strands of research that can impact policy. The first one could be labelled ‘piecewise implementation’ and coincides with efforts to challenge one key assumption of mainstream models at the time. A second strand is the further development of a sound empirical behavioural economics, based on increasingly available data. The third strand is a more radical ‘holistic’ approach, advocating a shift of theories of economic choice away from constrained maximization of neoclassical rational agents and toward behaviourally plausible mechanisms. Policymakers remain in general still distant from potential policy implications of the third line of research but they stand ready to consider the lessons stemming from the results of the first two strands of literature.

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