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Law, Finance, and the Investors Psychological Motive of Control

Published online by Cambridge University Press:  17 February 2009

Klaus Heine
Affiliation:
Dr.rer.pol., Research fellow, Department of Economics, Philipps-University Marburg.
Erich Oltmanns
Affiliation:
Dr.rer.pol., Research fellow, Federal Statistical Office Germany, and Department of Economics, Philipps-University Marburg.
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Extract

A recent survey by David Hirshleifer on investor psychology and asset pricing opens with a short story describing what might have happened to asset-pricing theory, had the founding fathers of modern finance not focused on rationality as the core of their thinking about financial markets, but, instead, followed Adam Smith, Irving Fisher, John Maynard Keynes and Harry Markowitz, who thought that psychology had a large impact on the outcome of financial markets. Had this path of theorizing been taken, today there might have been an influential school at the University of Chicago advocating the Deficient Markets Hypothesis and a Stanford psychologist would have become the inventor of a prominent asset-valuation model, the so-called DAPM (Deranged Anticipation and Perception Model).

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Articles
Copyright
Copyright © T.M.C. Asser Press and the Authors 2002

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References

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33 See, e.g., LLSV, supra n. 3.

34 In the literature on Law and Finance we find some variables, like “rule of law” or “risk of expropriation”, but to measure the predictability of a legal system from a psychological point of view these variables seem too broad.

35 Berkowitz, Pistor and Richard, supra n. 7.

36 See LLSV, supra n. 3.

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42 Heine, , Oltmanns, and Stahl, , “The Impact of Cognition on Institutions: How does the Motive of Control Affect the Building of Financial Institutions”, 3 Marburg: Volks-wirtschaftliche Beiträge (2000)Google Scholar, and Heine, , Oltmanns, and Stahl, , “The Impact of Cognition on Institutions: How does the Motive of Control Affect the Building of Financial Institutions”, in: Hölzl, (ed.), Proceedings of XXV Annual Colloquium of the International Association for Research in Economic Psychology (IAREP) and the Society for the Advancement of Behavioral Economics (SABE), July 12-16, 2000 in Baden, Vienna/Austria (2000) 190.Google Scholar

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44 Heine, Oltmanns and Stahl, supra n. 42.

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46 Beck, Demirgüç-Kunt and Levine, supra n. 43.

47 Heine, Oltmanns and Stahl, supra n. 42, would have had a maximum sample size of 22 countries. Therefore, the corresponding estimation results are not reported there.

48 This measure ranges theoretically from 0 (“no correlation”) to 1 (“perfect correlation”).

49 Small values (less than 0.1,0.05 or 0.1) mean that the estimated parameter has a significant influence. See, for instance, 0.059 in Table 2 for the (medium) significance of CONTROL on LTPDY.

50 Levine, supra n. 38.

51 Heine, Oltmanns and Stahl, supra n. 42.

52 For the assumptions underlying the method of constructing these proxies see Heine, Oltmanns and Stahl, supra n. 42.

53 Levine, supra n. 38.

54 Heine, Oltmanns and Stahl, supra n. 42.

55 Heine, Oltmanns and Stahl, supra n. 42.

56 Heine, Oltmanns and Stahl, supra n. 42.

57 See, e.g. Eucken, supra n. 8; Hay, , Shleifer, and Vishny, , “Toward A Theory of Legal Reform”, 40 European Economic Review (1996) 559.CrossRefGoogle Scholar

58 Berkowitz, Pistor and Richard, supra n. 7.

59 For a broad discussion of “big bang” transformation vs. incremental transformation, see the contributions in the special issue of the Journal of Institutional and Theoretical Economics, Vol. 156(1)(2000).Google Scholar

60 Huberman, , “Familiarity Breeds Investment”, Working paper 97-04, Columbia UniversityGoogle Scholar; Hirshleifer, supra n. 1.