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Hyman Minsky and behavioral finance

Author

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  • Steven Pressman

    (Colorado State University)

Abstract

Hyman Minsky is best known for his analysis of the instability of capitalism stemming from human psychological propensities. When optimism prevails, financial institutions make risky loans. As these loans get repaid, this generates greater optimism and more risk taking. Herd behavior reinforces this. Also, in good times financial institutions demand deregulation so they might make even riskier loans. At some point, the economic system cannot support the growing debt levels; unable to repay their loans, firms have to borrow money just to pay the interest on their debt. A financial crisis begins when loans are not repaid, financial institutions are in jeopardy of failure, and lending ends. For Minsky, the government can reduce the probability of financial crises by strictly regulating financial institutions; however, the government cannot prevent financial crises because it cannot control human psychology. The paper concludes with some remarks on Minsky and contemporary work in behavioral finance.

Suggested Citation

  • Steven Pressman, 2018. "Hyman Minsky and behavioral finance," Journal of Behavioral Economics for Policy, Society for the Advancement of Behavioral Economics (SABE), vol. 2(1), pages 33-37, March.
    • Handle: RePEc:beh:jbepv1:v:2:y:2018:i:1:p:33-37
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    References listed on IDEAS

    as
    1. Hyman P. Minsky, 1982. "Can “It” Happen Again? A Reprise," Challenge, Taylor & Francis Journals, vol. 25(3), pages 5-13, July.
    2. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    3. Robert J. Shiller, 2012. "Finance and the Good Society," Economics Books, Princeton University Press, edition 1, number 9652.
    4. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    behavioral finance; Minsky; bank regulation; financial crises; economic instability;
    All these keywords.

    JEL classification:

    • G4 - Financial Economics - - Behavioral Finance
    • G01 - Financial Economics - - General - - - Financial Crises
    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals

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