ON FINANCIAL FRAUDS AND THEIR CAUSES - INVESTOR OVERCONFIDENCE

This paper examines two possible explanations for why investors are so often and so easily taken by the likes of Robert Bennett and his New Era fraud or Nick Leeson's sinking of the esteemed Barings Bank. I rul e out the traditional explanations offered by neoclassical economics s uch as asymmetric information in a world of calculable risk. I argue t hat the literature on empirical psychology, which emphasizes how peopl e make choices in a world characterized by uncertainty provides a more plausible explanation for why financial fraud is so prevelant. The pa per emphasizes the interdisciplinary aspects of financial frauds and c oncludes with some policy prescriptions for preventing financial fraud .