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ECON 252: Financial Markets

Lecture 8 - Human Foibles, Fraud, Manipulation, and Regulation << previous session | next session >>

Overview:

Regulation of financial and securities markets is intended to protect investors while still enabling them to make personal investment decisions. Psychological phenomena, such as magical thinking, overconfidence, and representativeness heuristic can cause deviations from rational behavior and distort financial decision-making. However, regulation and regulatory bodies, such as the SEC, FDIC, and SIPC, most of which were created just after the Great Depression, are intended to help prevent the manipulation of investors' psychological foibles and maintain trust in the markets so that a broad spectrum of investors will continue to participate.

Reading assignment:

Robert Shiller, Irrational Exuberance, chapters 5, 6, and 7

Fabozzi et al. Foundations of Financial Markets and Institutions, chapter 3

Louis Brandeis, Other People's Money and How the Bankers Use It, chapter 5, pp. 92-108

William Douglas, Democracy and Finance, chapter 1, pp. 5-17

Class lecture:

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Resources:

PowerPoint slides from screen - Lecture 8 [PDF]

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