Open Yale Lecture 8

Human Foibles, Fraud, Manipulation, and Regulation

CLASS NOTES:

Today’s topic was Regulation.

1.                Wishful thinking – i.e. Election, game, investment

2.                Attention Anomalies  - Social bases,

3.                Anchoring

4.                Representativeness Heuristic

5.                Gambling behavior

6.                Magical thinking   - BF Skinner

7.                Quasi Magical thinking  Shafir + Tversky

Temptations of Market

1.                Oversell

2.                Hide info

3.                Loyalty to friends

Regulation

Louis Brandeis

1914 Other people’s money

Disclosure of truth

ð  States “Blue Sky Laws”

1920s Telephone  spread

Boiler Rooms

1934 Securities  + Exchange Commission  (SEC)   

                        Business ßà SEC

William O Douglas

“Democracy and Finance” 1940  - Finance for people

Legal Realism

Public + Private Securities

Public Company à Must disclose info (Regulation by SEC.gov)  Edgar

Hedge Fund – Private investment company  -- Low profile

3C1

99 investors

Accredited investors

3C7

500 investors

Qualified purchasers

Insider + Outsider

Regulation FD - 2000 … Full Disclosure - SCC

Market Surveillance

Example

1995 IBM – Lotus … Insider trading

Financial Accounting regulation

Standard Board FASB - 1975

GAAP

Net Income

Operating income

Other Standards

Core earning

Pro form

EBITDA

Balance Sheet : Asset T Liabilities

Off-balance sheet accounting … Enron Corp

                … Remove risky investment from the balance sheet by putting them in balance sheet of child/dummy companies

SIV – Structured Investment Vehicles

SIPC

Securities Investor protection Corporation  - 1970

FDIC Fed Dep Ins Corp – 1934

Currently $100,000

Conclusion: Need to keep improving regulation to protect small investors.