Financial regulation, collective cognition, and nation state crisis management

William Patrick Forbes (Department of Business and Economics, Loughborough University, Loughborough, UK)
Sheila O Donohoe (Department of Accounting & Economics, Waterford Institute of Technology, Waterford, Ireland)
Jörg Prokop (Department of Business Administration, Economics and Law, University of Oldenburg, Oldenburg, Germany)

Journal of Risk Finance

ISSN: 1526-5943

Publication date: 18 May 2015

Abstract

Purpose

The purpose of this cross-national study is to evaluate the communality and differences in experiences and policy responses in the run up to the 2007-2009 credit crisis and during its critical early stages in Germany, Ireland and the UK. The importance of shared cognitive illusions regarding the power and stability of financial markets is emphasised.

Design/methodology/approach

A multiple case study approach is used which draws on publicly available information to trace developments leading up to bank failures (or near failures) and the evolution of government responses drawing upon alternative paradigms used to justify State intervention.

Findings

Findings emphasise the role of state regulatory bodies and their response to the crisis as a primary source of the “rules of the game” in financial markets, here it is the “game of bank bargains” and a potential source of repair. Given the degree of interconnectedness, opacity and complexity of financial markets investors/politicians/regulators will fall victim to cognitive biases which affect their decisions.

Research limitations/implications

This case study method allows identification of patterns in decision-makers’ behaviour and yields richer insights than a quantitative approach but is limited in its generalisability.

Practical implications

This paper offers practical implications in suggesting that a pivotal step in effective crisis management requires directly addressing sources of uncertainty, namely, time pressure, complexity and opacity of underlying cause–effect relationships, empowering decision-makers to act responsibly.

Originality/value

This paper is novel in its illustration of the collective cognitive paradigm for justifying regulatory action across three countries using six case studies.

Keywords

Citation

William Patrick Forbes, Sheila O Donohoe and Jörg Prokop (2015) "Financial regulation, collective cognition, and nation state crisis management", Journal of Risk Finance, Vol. 16 No. 3, pp. 284-302

Download as .RIS

DOI

: https://doi.org/10.1108/JRF-10-2014-0157

Publisher

:

Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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