A Fast and Frugal Finance

Chapter 4

Financial regulations and heuristics^⁎

Abstract

The regulatory structure is the environment in which financial decisions are made, many of which we argue are made using heuristics. Evaluation of heuristic rules is only valid with respect to their environment. A study of the formation of the Dodd–Frank Bill illustrates this point. Financial regulations are discussed from a behavioural stance with respect to the distinction between risk and uncertainty, emphasising and illustrating how heuristics are tools for uncertainty management. The efficacy of fast-and-frugal trees in identifying vulnerable banks is showcased as evidence for the less-is-more principle in relation to the Basel III Accord. Mostly we are trained to believe that more information, ...