The global financial crisis-Market misconduct and regulation from a behavioral view

This paper explores the problem of the global financial crisis of 2008-9, using a behavioral perspective to examine in some detail the issue of governance failures. These failures are evident in the inadequate oversight/regulation provided by US financial market regulators, as well as the inability of financial market participants to adequately judge and assign risk measures to key financial instruments. In total, five elements of behavioral finance are shown to characterize the crisis. The paper shows how specific adjustments in government policy (dealing with market structural imperfections) and company governance (dealing mainly with risk management) can respond to the key elements of the crisis. It also points out that future financial crises cannot be avoided, so that mitigation is the only remedy to deal with such phenomena.