Thaler’s View On The Behavioral Origins Of The Financial Crisis
There’s nothing like reading about behavioral economics after eating a heavy dinner. Click Here To Read Full Article On The Behavioral Origins Of The Crisis
Article Introduction (Nudge Blog)
Mea culpas are rare these days. In a debate with John Kerry in 2004, President George W. Bush famously could not name a single mistake he had made in his first term. So it is both noteworthy and commendable that Alan Greenspan, the former US Federal Reserve chairman, fessed up that he had failed to anticipate the financial crisis.
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief,” he said. Mr Greenspan had faith that banks were prudent enough to make sure they were not lending money cheaply to people who could not pay it back. Yet that is what happened. As Mr Greenspan says of securities based on subprime mortgages: “To the most sophisticated investors in the world, they were wrongly viewed as a ’steal’.”
Conclusion (Via Nudge Blog)
Why did Mr Greenspan, along with the rest of the world’s regulators, fail to foresee that this could happen? We think their mistake was to neglect the role of human nature. To prevent future catastrophes, regulators should focus explicitly on how to provide safeguards against two all-too-human frailties explored by decades of work in behavioural economics: bounded rationality and limited self-control.
Greed and corruption helped create the crisis, but simple human frailty played a vital role. We will not be able to protect against future crises if we rail against greed and wrongdoers without looking in the mirror and understanding the potentially devastating effects of bounded rationality and limited self-control.
Click Here To Read Full Article On The Behavioral Origins Of The Crisis
