IBSS-Ex: Comprehending and Regulating Financial Crises

University Of California-Irvine, Irvine CA

Investigators

Abstract

This project focuses on how financial crisis is understood, how financial models are constructed and deployed, and how regulators attempt to solve financial crisis. It bears on fundamental dimensions of human behavior: How do market actors, experts, and regulators understand financial markets? How do they comprehend crises, and, consequently, what decisions do they make in the context of existing political and institutional structures? Many researchers have tried to pinpoint the causes of the financial crisis of 2008, to show how this financial crisis resembled those that came before, or to identify the optimal method for regulating financial institutions in wake of the crisis. Those attempts are dissatisfying because they are limited to inquiry within one disciplinary field. Our multidisciplinary approach engages natural and social sciences and the humanities, and draws on the broadest possible base of expertise and methods, including formal modeling, experimental research, statistical analysis, case studies, historical analysis, and ethnographic research. We focus on two central issues. First, we examine models of finance and crisis by conducting: a) formal analysis of classes of probability distributions used to represent returns; b) content analysis of confidence in financial models, awareness of their assumptions, and notions of crisis in popular and professional press; and c) experimental research evaluating how confidence in models influences investment behavior. Second, we analyze regulatory responses to crisis by conducting: a) an ethnography and retrospective ethnography of regulation at the Federal Reserve Bank of NY and at federal regulatory bodies located in Orange County, California; and b) a case study of the Securities and Exchange Commission?s response to the 1987 and 2007/08 crashes in the context of broader economic history of financial regulation in the U.S. Finance is potentially one of the most powerful tools for advancing the common good and national interest. As the recent years have shown, when financial models and regulatory models go awry, the consequences are severe and born by all sectors of society. This research will contribute both to knowledge and to policy debates about financial regulation. The project will produce several scholarly articles and a scholarly monograph intended for a multidisciplinary audience. The project will also result in training of a number of graduate and undergraduate students in sociology, anthropology, economics and philosophy of science, and expose them to a broad interdisciplinary collaboration that helps to overcome the tendency of "silo thinking" in relation to this crucial issue of the apprehension of and regulatory responses to crisis. The researchers have experience in bringing their scholarly work to broader audiences and will use the forums and platforms they have used in the past to promote their findings beyond academic audiences. This project is supported through the NSF Interdisciplinary Behavioral and Social Sciences Research (IBSS).