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Abstract

The theory of market equilibrium has affected considerably macroeconomic policies of most economies. It serves as a basis for changes and adjustments by governments when finance market goes wrong. Government intervention, after all, aims at bringing the market to its new equilibrium. In spite of their efforts, however, financial crises take place continuously and financial bubbles burst at an increasingly large scale. To find an answer to this situation we need a new theoretical framework. In this article, we use the behavioral finance theory to interpret nature of the crisis. This theoretical framework deals with relations between thought and reality with a view to affirming wrong awareness and behavior of the market and governments are real and undeniable. This leads to the fact that the market can’t reach it equilibrium as expected by the theory. With such recognition in mind, the government had better adopt a new way of intervention, thereby developing a more sustainable market.

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