Course pre-requisite(s): skills in MS Office; basic statistical skills; knowledge of main financial system functions
Course Overview
Uncertainty, an integral characteristic of the financial system functioning, can lead to the emergence of economic and financial shocks, that can become the causes of the unfolding of crises, which was demonstrated by the global financial crisis. This uncertainty becomes the reason for the need to adapt to new conditions that arise in the financial system due to political, economic, social, or other circumstances. Financial shocks in most cases threaten financial stability, and therefore there is an urgent need to take actions that can mitigate the effects of financial shocks.
This course highlights approaches to identifying and assessing financial shocks, the conceptual foundations of financial stability and financial soundness, the features of the financial system regulation and its role in overcoming financial crises, the main characteristics of the financial crises at the global and local levels, and ways to overcome them. Besides, given the fact that the occurrence of financial shocks is caused, among other things, by the irrational behavior of economic agents, attention will be focused on their behavioral aspects and patterns as subjects of the financial market. Cognitive biases, decision-making in the face of uncertainty, and the theory of diffusion of innovations will help to understand the modern financial markets functioning.
Learning Outcomes
By the end of the course students:
will find out:
- features of financial system design;
- financial shocks and financial crises causes and consequences;
- basic concepts relevant to financial stability;
- how policy decisions can help in prevention and overcoming of financial crises;
- how behavioral and neural discrepancies affect the decision making process;
- behavioral and economic background of financial shocks
- why cognitive biases and cognitive dissonance are so important to understand;
- the main differences between classical economic theories and real-life economic agents behavior.
should be able to:
- determine and analyze the financial soundness indicators;
- differentiate between monetary policy and macroprudential policy instruments in prevention and overcoming of financial crises;
- evaluate approaches to financial crises overcoming and compile different instruments in financial distress curbing;
- predict humans behavior in real-life situations;
- develop the behavioral strategies in case of uncertainty and risk presence.
will improve:
- written and communication skills;
- presentation skills in a concise manner;
- teamwork skills;
- problem-solving skills.
Course Content
Financial Shocks & Financial Crises
- origins of financial shocks;
- causes of different types of financial crises;
- interrelation and contagion;
- financial crises resolution;
Financial Stability & Macroprudential Regulation
Irrationality in Decision Making
- origins of behavioral theory;
- comparison of classical and behavioral theories;
- decision-making process in face of uncertainty;
- cognitive biases;
- diffusion of innovations theory;
- COVID-19: cognitive errors
Instructional Method
Lectures&seminars, interactive teaching, discussions, case studies, supporting videos, collaborative teamwork, poster presentation, behavioral experiments.
Required Course Materials
Facilities: laptops, Internet connection, multimedia projector.
Required readings and useful links:
- Kindleberger C. P. Manias, panics, and crashes: a history of financial crises. New York: John Wiley & Sons, 2000. 290 p.
- Lynn S., Wormwood J., Barrett L., Quigley K. Decision making from economic and signal detection perspectives: development of an integrated framework. URL: https://www.frontiersin.org/article/10.3389/fpsyg.2015.00952.
- McCoy P. The moral hazard implications of deposit insurance: theory and evidence. URL:https://www.imf.org/external/np/seminars/eng/2006/mfl/pam.pdf.
- Minsky H. P. The financial instability hypothesis. Working Paper # 74. Jerome Levy Economics Institute of Bard College. May 1992. 10 p. URL: http://www.levyinstitute.org/pubs/wp74.pdf.
- Reinhart C. M., Rogoff K. S. Recovery from financial crises: evidence from 100 episodes. American Economic Review: Papers & Proceedings. 2014. №104(5). P. 50–
- Schinasi G. Defining financial stability. IMF Working Paper. WP/04/187. URL: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Defining-Financial-Stability-17740.
- Financial Soundness Indicators and the IMF. URL: https://www.imf.org/external/np/sta/fsi/eng/fsi.htm.
- 2008 Financial Crisis: The Causes and Costs of the Worst Crisis Since the Great Depression. URL: https://www.thebalance.com/2008-financial-crisis-3305679.
- How To Have Users Spread Your Innovation Like Wildfire. URL: https://www.smashingmagazine.com/2015/01/how-to-have-users-spread-your-innovation-like-wildfire/
- The Cognitive Biases Tricking Your Brain. URL: https://www.theatlantic.com/magazine/archive/2018/09/cognitive-bias/565775.
- Behavioral finance and COVID-19. URL: https://www.ubs.com/global/en/wealth-management/insights/chief-investment-office/life-goals/2020/strategies-to-overcome-behavioral-biases.html
- Bansal T., Behavioral Finance and COVID-19: Cognitive Errors that Determine the Financial Future. URL: http://dx.doi.org/10.2139/ssrn.3595749
- Chunlei W., Dake W., Jaffar A., Kaifeng D., Riaqa M. Global Financial Crisis, Smart Lockdown Strategies, and the COVID-19 Spillover Impacts: A Global Perspective Implications From Southeast Asia. URL: https://www.frontiersin.org/article/10.3389/fpsyt.2021.643783
Assessment
I. Team project (40%)
- Poster presentation: 'Financial crisis: how different was it in our countries?'
II. Essay (25%)
III. Quiz (15%)
- Team-based quiz 'Financial Instability and Behavioral Theories'
IV. Final Test (20%)
- Tests
- True/False statements
- Critical thinking task