Does Regulation Prevent Fraud?
The Case of Manhattan Hedge Fund
By Chidem Kurdas
As the failure of the hedge-fund firm Manhattan Capital demonstrates, both government regulators and market players can make mistakes resulting from cognitive biases. Responding to such mistakes by strengthening government watchdogs, although often recommended, reduces both the watchdogs and the publics incentive to learn, thereby creating a vicious spiral of regulation, regulatory failure, and even more regulation.