Economic and Behavioural Aspects of the Euro Crisis

• Autorzy: Adam Szyszka
• Języki publikacji: EN

Abstrakty

EN

There are many reasons for the current state of affairs in the Eurozone, most of which fall within the scope of economics, politics, and human behaviour. In the first step, this paper briefly discusses the macroeconomic and fundamental background of the Eurozone turbulences. We argue that the roots of the crisis lie in the persistent imbalances within the Eurozone and the inflexibility of the common monetary policy that turned out to be inadequate for the dissimilar economies of the EMU. We also point at the mounting public debt, the high risks associated with the European banking sector, and the interdependence between the financial solidity of the banking system and government solvency across the Eurozone. However - contrary to many other commentaries - we consider the large public debt not as the primary reason for the crisis in Europe, but as an effect of the earlier lack of fiscal discipline and the result of external factors added on top. Later in this paper, attention is focused on behavioural aspects that might have contributed to the financial crisis and human inclinations that demonstrated themselves on that occasion. We discuss the extrapolation bias and problems with the time horizon of the decision makers, the underestimation of risk due to overconfidence and the difficulties with the probability estimation of extreme scenarios. We define "the Euro heuristic", a phenomenon responsible for overseeing the risk disparity among various members of the EMU, and explain why bad news gets accepted relatively slowly. Herding, the activities of hedge funds, and the role of rating agencies are also deliberated upon. The behavioural approach to the recent European crisis and the application of psychological inclinations in this particular context, constitute the original contribution of this paper. The findings of the paper may help to avoid similar mistakes in the future, especially for prospective Eurozone members in years to come.(original abstract)

Słowa kluczowe

EN

Eurozone; Currency crisis; Behavioural finance; Euro crisis

PL

Strefa euro; Kryzys walutowy; Finanse behawioralne; Kryzys euro

• Czasopismo: Argumenta Oeconomica
• Rocznik: 2013
• Numer: nr 2 (31)
• Strony: 49--74

Twórcy

autor

Adam Szyszka

• Warsaw School of Economics, Poland

Bibliografia

• Arghyrou, M., Chortareas, G., Current Account Imbalances and Real Exchange Rates in the Euro Area, "Review of International Economics" 16, pp. 747-764, 2008.
• Balcerowicz, L., Fiscal Stance, Macroeconomic Stability, Growth, Presentation at the Federal Ministry of Finance, Berlin, December 2011.
• Barber, B., Odean, T., Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment, "Quarterly Journal of Economics" 141, pp. 261-292, 2001.
• Benartzi, S., Thaler, R., Myopic Loss Aversion and the Equity Premium Puzzle, "Quarterly Journal of Economics" 110, pp. 73-92, 1995.
• Benartzi, S., Thaler, R., Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments, "Management Science" 45, pp. 364-381, 1999.
• Blanchard, O., Giavazzi, F., Current Account Deficits in the Euro Area. The End of the Feldstein Horioka Puzzle?, "Brookings Papers on Economic Activity" 2, pp. 147-209, 2002.
• Dadush, U., Stancil, B., Europe's Debt Crisis: More Than a Fiscal Problem [in:] Dadush, U. (ed.), Paradigm Lost. The Euro in Crisis, pp. 9-15. Carnegie Endowment for International Peace, Washington, D.C., 2010.
• Edwards, W., Conservatism in Human Information Processing [in:] Klienmutz, B. (ed.), Formal Representation of Human Judgment, pp. 17-52. Wiley, New York, 1968.
• Einhorn, H., Hogarth, R., Confidence in Judgement: Persistence in the Illusion of Validity, "Psychological Review" 85, pp. 395-416, 1978.
• Fischhoff, B., Slovic, P., Lichtenstein, S., Knowing with Certainty: The Appropriateness of Extreme Confidence, "Journal of Experimental Psychology" 3, pp. 552-564, 1977.
• Gärtner, M., Griesbach, B., Jung, F., PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies, Discussion Paper no. 2011-06, Universität St. Gallen, 2011.
• Gilovich, T., Vallone, R., Tversky, A., The Hot Hand in Basketball: On the Misperception of Random Sequences, "Cognitive Psychology' 17, pp. 295-314, 1985.
• Glaser, M., Weber, M., Overconfidence and Trading Volume, "The Geneva Risk and Insurance Review" 32, pp. 1-36, 2007.
• Gomulka, S., Perspectives for the Euroland, Short Term and Long Term, "Polish Quarterly of International Affairs", no 2/2012 (in print), 2012.
• Hedge Fund Research Industry Report www.hedgefundresearch.com
• Holinski, N., Kool, C., Muysken, J., International Portfolio Balance - Modelling the External Adjustment Process, METEOR Research Memorandum 09/033, pp. 1-25, 2009.
• IMF Global Financial Stability Report, September 2011, available on-line http://www.imf.org/External/Pubs/FT/GFSR/2011/02/index.htm
• ISDA: Greek Debt Restructuring Triggers CDS Payouts, "The Wall Street Journal", March 9th, 2012.
• Kahneman, D., Tversky, A., Prospect Theory: An Analysis of Decision Under Risk, Econometrica 47, pp. 263-292, 1979.
• Keynes, J. M., The General Theory of Employment, Interest and Money. London, Macmillan & Co, London, 1936.
• Lane, P., Milesi-Ferretti, G., The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004, "Journal of International Economics" 73, pp. 223-250, 2007.
• Lord, C., Lepper, M., Ross, L., Biased Assimilation and Attitude Polarization: The Effects of Prior Theories on Subsequently Considered Evidence, "Journal of Personality and Social Psychology" 37, pp. 2098-2110, 1979.
• Montgomery, H., Naturalistic Decision Making, Working Paper, Conference on Subjective Probability, Utility, and Decision Making, Mannheim, 1997.
• Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland. Report of the Commission of Investigation into the Banking Sector in Ireland, March 2011, available online http://www.bankinginquiry.gov.ie
• Mundell, R., A Theory of Optimum Currency Areas, "The American Economic Review" 51, pp. 509- 517, 1961.
• Nisbett, R., Wilson, T., The Halo Effect: Evidence for Unconscious Alternation of Judgments, "Journal of Personality and Social Psychology" 35, pp. 250-256, 1977.
• Odean, T., Volume, Volatility, Price, and Profit When All Traders Are Above Average, "Journal of Finance" 53, pp. 1887-1934, 1998.
• Olsen, R., Investment Risk: The Experts' Perspective, "Financial Analysts' Journal" 53, pp. 62-66, 1997.
• Rosenzweig, P., The Halo Effect: ... and the Eight Other Business Delusions That Deceive Managers. Free Press, New York, 2007.
• Simon, H. A., A Behavioral Model of Rational Choice, "Quarterly Journal of Economics" 69, pp. 99-118, 1955.
• Szyszka, A., Finanse behawioralne. Nowe podejście do inwestowania na rynku kapitałowym [Behavioural Finances. A New Aprroach to Investing in the Capital Market]. Wydawnictwo Uniwersytetu Ekonomicznego w Poznaniu, Poznań, 2009.
• Szyszka, A., Behavioral Anatomy of the Financial Crisis, "Journal of CENTRUM Cathedra" 3, pp. 121-135, 2010.
• Taylor, S., Brown, J., Illusion and Well-Being: A Social Psychological Perspective on Mental Health, "Psychological Bulletin" 103, pp. 193-210, 1988.
• Thorndike, E. L., A Constant Error in Psychological Rating, "Journal of Applied Psychology" 4, pp. 25-9, 1920.
• Tversky, A., Kahneman, D., Judgment Under Uncertainty: Heuristics and Biases, "Science" 185, pp. 1124-1131, 1974.
• Wason, P., Reasoning [in:] Foss, B. (ed.) New Horizons in Psychology, pp. 131-151. Penguin, Harmondsworth, 1966.