How banks and other financial institutions think

Thompson M (2018). How banks and other financial institutions think. British Actuarial Journal 23: e5. DOI:10.1017/S1357321717000253.

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Abstract

Conventional diagnoses of the 2007/8 Global Financial Crisis see it as “abnormal”, and then resort to explanations in terms of “irrational exuberance”, “animal spirits”, “herding behaviour” and so on. The prescription – “better regulation” – then follows automatically, as it has done after every such crisis, all the way back to tulipmania 400 years ago. But if there are different “seasons of risk”, and if financial sector actors are able to latch onto different risk-handling strategies, each appropriate to one of those seasons and inappropriate to the others, then we have a very different explanation: one in which, in contrast to both neoclassical and behavioural economics, rationality is no longer singular. This “anthropological” hypothesis has its roots in Mary Douglas’s book “How Institutions Think”, and the paper shows how it is well supported by historical evidence, agent-based modelling, and fieldwork among both financial sector firms and their regulators, as well as by parallels from ecology, organisation theory and evolutionary (i.e. Schumpeterian) economics.

Item Type: Article
Uncontrolled Keywords: Risk management, Model risk, ERM, Investment, Plural rationality
Research Programs: Risk & Resilience (RISK)
Risk, Policy and Vulnerability (RPV)
Depositing User: Michaela Rossini
Date Deposited: 26 Jan 2018 15:53
Last Modified: 13 Feb 2018 08:34
URI: http://pure.iiasa.ac.at/15083

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