The myths of financial economics

The myths of financial economics include the myth that credit rating agencies provide useful information about the default risk embodied in securities, the myth that some financial institutions are too big to fail, the myth that women are more risk-averse than men, and the myth that covered interest parity (CIP) is a testable hypothesis. The last two myths result from either faulty empirical testing or (in the case of CIP) the very use of empirical testing. On the other hand, believing that credit rating agencies provide useful information that can be used to buy securities was an important contributor to the materialization of the global financial crisis. The most damaging myth, however, is the myth of ‘too big to fail’, because it means that the government should channel taxpayers’ money to failed financial institutions, thus diverting resources from where they would produce more value for the society.