Behavioral finance and implications for regulation: China’s stock market

Bace, Edward (2019) Behavioral finance and implications for regulation: China’s stock market. In: London Business Conference in Business and Social Studies, 21 Aug 2019, London.

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Abstract

In regulation of financial services, supervisory authorities have relied to a great extent on theoretical models developed in academia and applied to the often less predictable world of financial markets. The theory typically assumes that investors are rational, whereas countless empirical studies indicate that often the reverse is true. This short exposition argues that regulators should take greater account of the many human behavioural factors affecting investment decisions, and uses the Chinese “equity mania” of 2015 as an example. A classic case of an asset bubble, this ultimately destructive phenomenon was facilitated by the authorities, who loosened regulations in an ill-advised effort to boost domestic investment. Classic examples of irrational behavioral heuristics on the part of investors, who were largely made up of poorly educated individuals, were manifested in this bubble, repeated so often throughout the world and over the centuries. These include errors of framing, overconfidence, hindsight and confirmation, as well as herding errors. The value destruction witnessed in the Chinese example emphasises the need to try and incorporate behavioural errors into forward thinking regulation; for example, as retail dominated, debt fuelled investment rises, this would be the time to place more controls on margin lending, rather than reducing them. Ongoing analysis of such events, and implementation of lessons learned, thus have important implications for public policy in financial services, the overriding aim of which should be financial stability.

Item Type: Conference or Workshop Item (Paper)
Research Areas: A. > Business School
A. > Business School > Accounting and Finance
A. > Business School > Centre for Enterprise and Economic Development Research (CEEDR)
A. > Business School > Economics
A. > Business School > International Management and Innovation
A. > Business School > International Management and Innovation > Corporate Social Responsibility and Business Ethics group
A. > Business School > International Management and Innovation > International Business group
A. > Business School > International Management and Innovation > International and Cross-cultural Management group
A. > Business School > Leadership, Work and Organisations
Item ID: 27454
Useful Links:
Depositing User: Edward Bace
Date Deposited: 28 Aug 2019 07:36
Last Modified: 30 Aug 2019 18:40
URI: https://eprints.mdx.ac.uk/id/eprint/27454

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