9 recognition that there is no such thing as an ideal regulation. This is because financial products are amenable to endless innovation. Banks and financial organizations will keep developing new products the way the medical industry keeps discovering new drugs. And with each such financial innovation we may need to modify and make our regulatory regime more sophisticated. Hence, this is one area where we have to reject the language of optimal regulation, which has a static connotation, and be prepared to have regulatory bodies that are flexible and ready themselves to innovate. This is complicated by the fact that in signing on to financial products people are often not rational and instead give in to emotions, hyperbolic discounting, and framing delusions, as pointed out repeatedly in the new behavioral economics literature.

One possibility is to think of labeling certain financial products as “prescription goods” and creating the equivalent of doctors in finance who have to sign off before a person is allowed to buy a financial product. We could, for instance, decide to allow a balloon mortgage but before someone can commit to it, one has to get a “finance doctor” to sign off on the financial viability of the person to take on such a contract. This cannot be done by mechanically following practices in medicine, but there is a case for giving serious thought to such an architecture.

The interface between economics and psychology, and, more specifically, behavioral economics, has witnessed great strides; and we have tried recently to bring this to bear on the agenda of development policy, with our _World Development Report_ on _Mind, Society, and Behavior_ (see World Bank 2015a). By drawing on evidence from laboratory experiments and field observations from around the world, behavioral economics teaches us a lot on _how_ and where we should intervene.<sup>9</sup> However, there is a risk of this discipline becoming a catalogue of findings. I call this a risk because of a propensity to think of the findings as set in stone, not realizing that they may be true in some societies at certain stages of development, and could be different at other places and other times.

What is also needed is an effort to marry these findings more effectively with the concept of equilibrium (Akerlof and Shiller 2015) so that we can leverage them to get much more out of them and also to be able to predict better how these findings are likely to change from one society to another and also evolve over time. To my mind, one of the great contributions of traditional economics is the idea of equilibrium, which has many manifestations, from the general competitive equilibrium to Nash. The needed agenda is to broaden the description of individuals from the narrow _homo economicus_ to that of more real individuals with quirks, irrationalities, and social norms, and then use the idea of equilibrium in conjunction with this.<sup>10</sup> What makes this intellectually challenging is that for most real phenomena, which seemingly rely on human irrationality or adherence to social norms, it is possible, with analytical ingenuity, to

> 9 See Kahneman (2000), Thaler and Sunstein (2008), Hoff and Stiglitz (2016).

> 10 For a very interesting paper that attempts this, see Hoff and Stiglitz (2016). Earlier, Gintis (2009, chapter 10) provided an elegant model of bringing together the idea of human sociality and economic equilibrium within a unified game‐theoretic discourse.