Behavioural perspectives on the crisis

Citation

Forbes, W., Hamalainen, P. and Gulnur Muradoglu, Y. (2010), "Behavioural perspectives on the crisis", Qualitative Research in Financial Markets, Vol. 2 No. 1. https://doi.org/10.1108/qrfm.2010.40702aaa.001

Behavioural perspectives on the crisis

Article Type: Guest editorial From: Qualitative Research in Financial Markets, Volume 2, Issue 1

It is perhaps too early to speak of true, as opposed to claimed, causes of the recent financial crisis. Politicians blame “greedy” bankers. Bankers blame naive, or complicit, regulators. In turn, regulators and politicians feel that they are held hostage to a short-term electoral cycle. The crisis has many outraged victims, without yielding any clear villains of the piece. In this atmosphere of mutual recrimination, a general despair over failing of “human nature” remains. Steil (2009) puts very similar thoughts in this way:

Although debt fuelled manias and crashes undoubtedly have roots in human psychology, trying to eradicate failings of human nature through regulation is not merely exceptionally ambitious but also prone to serious unintended consequences. After all, risk taking is the very source of economic progress (Council on Foreign Relations).

This volume of the QRFM is on the behavioural perspectives of the crisis. We have three papers that ask more concretely what we mean by “human nature” and what systematic elements of that nature are proximate causes of the financial crisis. An illusion of untold prosperity, via the web, or securitisation; add the magic fairy dust of leverage and the game is on for another bubble. Before, we commence on the run up to the next bubble, or even have time to digest the painful unfolding of the crisis, the Behavioural Finance Working Group (BFWG) convened a meeting at Cass Business School on 10-11 December 2009. This conference represents the first of what we expect to be an annual event organised by the BFWG, with each conference tapping into the latest developments in the field of behavioural finance. The papers in this volume have been carefully selected through a rigorous refereeing process from the papers presented at the BFWG conference. As organisers for the very first BFWG conference, we had expected to attract a small number of papers. In the event, we were swamped with interest, attracting more than 60 participants, both academics and practitioners, from across the world.

The first paper of the special issue is written by Yaz Gulnur Muradoglu of Cass Business School. The paper is entitled “The banking and financial crisis in the UK: what is real and what is behavioural?” She argues that some of the triggers of the crisis are real and some are behavioural. The real triggers of the crisis such as the international nature of finance industry, and the securitisation process are necessary and will not change. In contrast, the underestimation of risks by almost all agents in the economy is behavioural and these need to be incorporated into new banking regulations. The paper also examines the immediate reactions to the crisis in the form of short-term policies and concludes with a discussion on the longer-term policy directions.

The second paper of the special issue is written by Stuart Trow. Stuart Trow comes from the city; he is the Credit Strategist of the European Bank of Reconstruction and Development. His paper is entitled “Did the behaviour of central banks make the credit crisis inevitable?” He discusses the central bank policy errors which he argues fuelled the possibility of a crisis with due reference to the behavioural issues embedded in their actions.

The third paper is co-authored by Werner DeBondt, William Forbes, Paul Hamalainen and Yaz Gulnur Muradoglu. The paper is entitled “What can behavioural finance teach us about finance?” The paper provides a background to the key aims of behavioural finance research and the development of the discipline over time. It indicates some future research issues on behavioural finance that emanate from the financial crisis and highlight areas of mutual benefit to both behavioural finance academics and the finance industry so as to encourage a creative cross-fertilisation. The paper draws on the key themes raised at a round table entitled “What behavioural finance can teach us about wholesale and retail finance markets” that was organised by the BFWG with the support of the knowledge transfer network. Participants were a mixture of practitioners and academics and the roundtable was chaired by Professor Chris Clack of University College London.

While the crisis has certainly been an international disaster, causing much pain and genuine hardship, it has certainly had its upsides for our intellectual lives and engagement with our fellow academics as well as practitioners. The special issue provides a behavioural perspective on the crisis with a balanced approach to academics and market participants whose ideas have driven our academic work in the last few decades.

William Forbes, Paul Hamalainen, Yaz Gulnur MuradogluGuest Editors