Can politicians, policymakers and corporate executives trust finance economics experts? This is the million-dollar question. Or rather the multi-billion dollar question. Given the current recession, the legitimacy of many top analysts has been called into question. Some of this damaging slander is overstated, since there are a number of businesses with their own economists that seem to be faring just fine. Bank checks proved viable and business safety rating raised no eyebrows, not yet.
When the housing boom started to slow and home values started dipping slightly, behavioral economics experts thought it was a logical progression for the over-inflated market to bubble and pop. One thing no one saw coming was the crumpling of so many giant bank and financial institutions over just a few months of time.
Financial economics focus on the fair values of assets, how risky assets are, which discount rates should be applied, what cash flows will come from a transaction and which assets or events cash flows are dependent upon. As such, it has classically been at-odds with behavioral economic theory. Commodities, stocks, bonds, derivatives, money market, financial institutions, regulations; these are all the language of bank and finance economics.
Critics say behavioral microeconomics fails to provide large-scale evidence of how these small factors affect large economies and they fail to offer up new economic paradigms in place of the old flawed systems. Perhaps the trouble with finance economics is also the trouble with any sort of economic field of study; these different schools of thought refuse to consider others’ ideas. There are financial and behavioral economics professors. There are micro and macro economics theorists. The truth lies somewhere in-between these disparate ideas about how large and small-scale economies function and what variables affect them the most.
One of the most interesting findings pertaining to behavioral and finance economics is how a person reacts to loss. Economics research suggests that, during periods of loss, some investors can become “extremely irrationally risk-averse,” which leads them to take exaggerated reactions. For instance, when the real estate bubble burst, which was long expected as a natural progression, many investors hastily pulled all their money out of the stock market, which caused widespread panic and a domino effect of other investors who did the same. The question economists must ask now is how can they restore consumer confidence and keep it?
[...] Originally posted here: Becoming Who You Want To Be » Bank & Business Commerce Dealings … [...]