Investment fraud in the light of behavioral finance – integration of psychological aspects into financial regulation


CALL: 2019

DOMAIN: LE - Law, Economics, Finance





HOST INSTITUTION: University of Luxembourg

KEYWORDS: Behavioral finance, financial regulation, investment fraud, social influence

START: 2019-12-01

END: 2023-11-30


Submitted Abstract

Present financial regulation is based on neo-classical economy that treats traders as rational profit maximizers who act on price information. At the core of the present financial thinking is the Efficient Market Hypothesis, a key financial economic idea, whereby share prices reflect all available information and a so-called homo economicus: fully rational agent who makes intelligent choices. Within this paradigm, information is one of the basic elements for investor rational decisions. This approach is strongly reflected in the European legislation which mainly regulates the matters of: asymmetric information and quantifiable indicators. PhD will explore a different approach, based on insights from behavioral economics on the one hand and social influence strategies on the other hand. In contrast to the classic model, whereby decision-making is linked to information, knowledge and experience, PhD thesis will link decision-making to those areas of the mind that are emotional and irrational. Research will be focused on analyzing which cognitive biases and emotions influence decision-making and how financial fraudsters use these psychological aspects to commit their fraud. While it is true that behavioral finance is gaining an increasing attention in academic research and practical application, it is still not very clear how it can serve as a mean to improve legal protection of investors. The objective of the research is to analyze which psychological mechanisms (biases, emotions) play a key role within financial fraud, how fraudsters manipulate investors and finally how to reconcile insights from behavioral finance, neuroscience and social science with legal regulations based upon traditional paradigms of rationality. Contrary to the traditional financial regulation which protects investors mainly by requiring companies and financial intermediaries to release complete and accurate information, PhD proposes to redesign financial regulation in the way to take into consideration human factors like behavior, thinking and emotions.

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