Abstract
At this point we turn our attention to risk management in the financial sector. The next several chapters apply the concepts developed to analyze the psychological dimension of risk management at major financial institutions that were at the heart of the global financial crisis. This chapter sets the stage by providing a general framework for understanding financial instability from a macroprudential perspective, in which macroprudential is understood as referring to the welfare of the financial system as a whole. To do so, the chapter presents the insights of acclaimed economist Hyman Minsky, who died in 1996. Minsky’s study and analysis of the causes and consequences of financial fragility, financial crises and economic instability are unparalleled.1
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Notes
See Hyman Minsky (1986), reprinted in 2008. Stabilizing an Unstable Economy (New York: McGraw-Hill). The original publication date for this book occurred as a financial crisis was developing in the savings and loan
This chapter draws from my previous writings. See Hersh Shefrin and Meir Statman (2012), “Behavioral Finance in the Financial Crisis: Market Efficiency, Minsky, and Keynes,” in Rethinking the Financial Crisis, ed. Alan Blinder, Andrew Lo, and Robert Solow (New York: Sage Foundation/Century Foundation), 99–135. Also see Hersh Shefrin (forthcoming), “Assessing Hyman Minsky’s Insights,” in The Global Financial Crisis: Economics, Psychology, and Values, ed. A. G. Malliaris, L. Shaw, and H. Shefrin (New York: Oxford University Press).
For information about the financial crisis, I draw on several sources. See Financial Crisis Inquiry Report, 2011. Washington, DC: US Government Printing Office, available at http://fcic.law.stanford.edu/and Martin Wolf (2014), The Shifts and the Shocks (London: Penguin Press HC).
See John Coates (2012), The Hour between Dog and Wolf: How Risk Taking Transforms Us, Body, and Mind (New York: Penguin).
See Susan Greenfield (2015), Mind Change: How Digital Technologies Are Leaving Their Mark on Our Brains (New York: Random House).
Paul McCulley (2009), “The Shadow Banking System and Hyman Minsky’s Economic Journey,” in Insights into the Global Financial Crisis, ed. Laurence B. Siegel. (Charlottesville: Research Foundation of CFA Institute), 224–256.
See Alan Blinder (2013). After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. (New York: Penguin). The discussion about “Mr. Bailout” appears on p. 123. In his book and in later writings, Blinder is unequivocal in his view that Minsky was right. See Alan Blinder (2015), “Can Economists Learn? The Right Lessons From the Financial Crisis,” Foreign Affairs March-April, https://www.foreignaffairs.com/reviews/review
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© 2016 Hersh Shefrin
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Shefrin, H. (2016). Minsky, the Financial Instability Hypothesis, and Risk Management. In: Behavioral Risk Management. Palgrave Macmillan, New York. https://doi.org/10.1057/9781137445629_7
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DOI: https://doi.org/10.1057/9781137445629_7
Publisher Name: Palgrave Macmillan, New York
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