A better understanding of behavioural spillovers leads to better institutions and markets
In today's turbulent financial markets, understanding how the behaviour of one economic actor affects another – i.e. behavioural spillovers – is pivotal for unravelling complex economic phenomena such as the equity premium puzzle. This is especially important since economists often analyse each institution by itself, overlooking important behavioural spillovers that affect financial markets. Bringing together an international team of researchers, the EU-funded BSDIM (Behavioural spillovers and the design of institutions and markets) project investigated how spillovers arise and how understanding them could help design markets and institutions. To achieve its aims, the project team worked on articulating a theoretical framework that reveals how behavioural spillovers can be exploited for institution and market design. It studied spillovers in specific markets and institutions, focusing on risk-taking behaviour in financial markets and the provision of public goods. It also worked to highlight how financial markets and mechanisms providing public goods can be improved to account for the behavioural spillovers identified. The work involved examining decision making under uncertainty and looking at how different informational systems can differentially affect risk preferences. In this vein, the team found evidence that living in environments with a large degree of uncertainty impacts risk preferences in future decisions, even if such decisions present substantially lower degrees of uncertainty. BSDIM successfully developed its theoretical framework and disseminated its results through research journals and publications. Social scientists, policymakers and market experts interested in how environments of different degrees of uncertainty shape risk preferences could find these results very insightful. Better policy interventions and market mechanisms could emerge from considering and applying the knowledge gained from this research.
Keywords
Behavioural spillovers, financial markets, equity premium, public goods, risk preferences
