Mind Over Money

Money, it's a gas
Grab that cash with both hands and make a stash
--Pink Floyd

Just took in this PBS show per my sister's heads up. The show trots out the big names to pit the rational vs behavioral arguments w.r.t. financial decision making.

Simple observation suggests a behavioral component to decision-making of all stripes--not just finance/econ. Yesterday chewed thru a very interesting paper in JBF along these lines.

It's interesting to observe the Gene Fama's of the world argue that behavioral, emotional components don't matter in economics and finance.

The PBS show did leave me wanting from a couple of angles. The show's producers seemed to imply/assume that the behavioral component that helped shoot housing prices higher and collapse credit mkts over the past few yrs occurred in the context of a free, unhampered market.

This is an inaccurate assumption. The interesting and intellectually honest question is how might the installed based of regulation interact with behavioral components to exacerbate natural optimism/pessimism cycles?

The show also implied that, because financial decisions involve an emotional component that can cause folks to sometimes behave irrationally, then financial markets are ripe for regulation. As we've already noted, markets are already regulated. The PBS show in fact shows clips of both Alan Greenspan and Ben Bernanke chatting up the health of the housing mkts as bubbles blew in 2005.

If regulators are people too, and suffer from the same behavioral flaws as others, then how can we expect effective oversight and control? The answer, of course, can be found in observing financial regulators' behavior and effectiveness over the past few yrs.