The Workshop- organized by the Herbert Simon Society– will take place in Rome at Bank of Italy next December 6th , aims to analyse how the behavioural finance is impacting on financial policies and regulations. Behavioral sciences are already influencing policy making in many different areas. Behavioral insights are effective in fiscal, environmental, health, education and security policies and regulations. Nudge and Behavioral Insights Units and team have been established in most of OECD countries. Their conceptual tools are mainly the behavioural economics and the agent based modelling. The heuristic revolution is proposing another promising powerful tool for policy makers.

Some are the examples of behavioural finance inspired regulations and policies: the rules for assessing the risk profiles of investors and savers; the behavioural regulations against predatory lending; the proposed particulars for behavioural financial education for financial advisors.

But is the behavioural finance a revolution? A research revolution is a fundamental and sustainable structural change of a science, usually abruptly or in a relatively short time.  Research revolutions in finance are not prominent.  It is not clear whether the changes highlighted above in the history of financial market research are worth the word revolution at all, since it is usually the case that the old knowledge continues to exist in finance.  Rather, as in economics, there are two fundamental dogmas in Finance, which are always repeated in the sense of the Hegelian dialectic of thesis, antithesis and synthesis.  One dogma is the combination of the rationality of the decision‐makers and the efficiency of the markets, the other the stressing of the decision‐making errors (behavioral biases) and the market anomalies (speculative bubbles, etc.).  Graham and Dodd assumed that the market is not rational because the price is not always equal to the fundamental value.  The mean variance analysis, the CAPM and the efficiency market hypothesis are the counterpoint to this. Behavioral finance comes back to the original realization ‐ but now at a higher level ‐ that investors and markets are not always rational.  Each step seems like a revolution, however, the economic science moves rather in the form of a spiral of thesis, antithesis, neo‐synthesis and Neo‐antithesis, etc. As Finance continued to develop at the individual and at the market level, the most appropriate image of this development is a double helix: two DNA strands (individual and market levels) move between rational and behavioral view ‐ or between the view that markets are efficient or full of market anomalies.  Finally recently there is the birth of what Gerd Gigerenzer (2015)  has coined the “heuristics revolution”.

The heuristics revolution in finance requires progress on two levels.  On the one hand, one has to find the intelligent rule of thumb, which works well in the uncertain worlds of financial investments.

On the other hand, one would like to implement these rules, which is the reason for an entrepreneur’s decision‐making.  Also, you should analyze the great investors closely to understand their heuristics and to get suggestions for intelligent rules of thumb.  In addition, good methods are needed to test the rules of thumb (with several back tests and stress tests).  In the sense of the above dialectics of finance, it is also important to identify which of the biases listed in Behavioral Finance as investment mistakes in risk decisions are a clever heuristic in the world of uncertainty. In addition, one must also lead the other strand of knowledge and develop a new asset pricing model, in which heuristics are an integral part of the decision‐making process.

This first Workshop that will have annual frequency aims to introduce such items and assess their validity. Moreover it will try to deal with how cognitive and behavioural sciences may contribute to a better financial policy and regulation making. For example in increasing trust in the financial market or in supporting a growth of capital market for industrial development.

Proceedings of the Workshop will be published in 2018.

About author:

Posted by
Name of institution/organization
Contact person