A Personality Theory of Sophisticated Investor Decision-Making (In the 2008 Financial Crisis), with Some Policy Implications

This paper argues that a nuanced view of sophisticated investors, as well as sellers and structurers of financial instruments, articulated within a rationality paradigm, has implications for financial regulation. The paper distinguishes between conformist investors, who tend to herd, and confident investors, of which contrarians are a notable subgroup, who very much do not herd; sellers who are more aggressive, acting in accordance with strong form caveat emptor, sellers who are more empathetic, and those somewhere in the middle; and finally, focused structurers, who figure out how to achieve a particular objective, and holistic structurers, who also consider whether the objective (perhaps, an end-run around regulation) should be achieved. Regulation will work best if the different types of actors and their interactions are taken into account