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Human cognitive biases
Familiar cognitive errors that afflicted everyone: investors, home buyers, lenders, regulators.
The analysis in this section draws on
Megan McArdle's blog post
on The Atlantic.com:
"How did it all happen?"
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⌅
The Global Financial Crisis
The Global Financial Crisis☜Exploring the causes, consequences and responses to the global financial crisis. ☜F1CEB7
⌃
Long-term causes of the financial crisis?
Long-term causes of the financial crisis?☜What are the long term causes of the current financial crisis?☜FFB597
■
Human cognitive biases
Human cognitive biases☜Familiar cognitive errors that afflicted everyone: investors, home buyers, lenders, regulators.☜59C6EF
↳
Forms of human cognitive bias?
Forms of human cognitive bias?☜☜FFB597
↳
Homebuyers saw rising house prices as natural order
Homebuyers saw rising house prices as natural order☜Homebuyers looked at 50 years of steadily rising home prices, with few and small declines, and concluded that rising home prices were some kind of natural law.☜98CE71
↳
Investors underweighted systemic risk
Investors underweighted systemic risk☜Investors focused on the likelihood that an individual security would underperform: not at what might happen if house prices suddenly dropped ten percent, or credit markets violently contracted.☜98CE71
↳
Lenders overconfident in their ability to manage risk
Lenders overconfident in their ability to manage risk☜With house prices rising steadily loan default rates fell, and lenders—overweighting recent events, looking at other people lending, and mindful of their immediate financial and competitive incentives—concluded that it was safe to continue lending.☜98CE71
↳
Regulators overestimated their powers of insight and response
Regulators overestimated their powers of insight and response☜Regulators believed that improvements in both computer models, and in economic theory of regulation, would allow them to identify and halt any crisis before it occurred.☜98CE71
↳
Cognitive Biases are constant
Cognitive Biases are constant☜Human cognitive biases have not changed much over the last thousand years, let alone the last ten years. Therefore, they may have amplified certain aspects of the crisis, but can not be the sole explanation.☜EF597B
⇤
House price bubble in the US
House price bubble in the US☜House price bubble in the US.☜FFFACD
⇤
Credit-rating agencies underestimated risks
Credit-rating agencies underestimated risks☜Credit rating agencies failed to appreicate and state the true nature and scale of the risks faced by the insititutions they were rating.☜FFFACD
□
Money is created through interest bearing loans.
Money is created through interest bearing loans.☜The global money supply doubles every decade. Most is created by banks issuing loans (=>debt) at interest. All countries bar 4 are in debt - not to each other, but to banks. It should not surprise us therefore that the world economy has vast amounts of debt at its centre. ☜FFB597
□
Unustainable forces of production/consumption: Capitalism
Unustainable forces of production/consumption: Capitalism☜ Advertising creates unsustainable needs Wellbeing/status measured by consumption Wages stop growing equal to productivity in 1970s Workers exploited more > solace in consumption Encouraged to Borrow Unsustainably☜59C6EF
□
Unintended consequences of earlier public policy choices
Unintended consequences of earlier public policy choices☜The roots of the crisis lie in the unintended consequences of policy choices made with respect to the financial sector over the last 30-40 years—which have allowed the volume of (all kinds of) debt in the global financial system to explode.☜59C6EF
□
Lack of financial literacy.
Lack of financial literacy. ☜Lack of practical financial education is one of the long-term causes of the Great Recession. In no small measure, the current crisis is an unintended consequence of a massive educational failure that turned a blind eye to teaching young Americans about the economy.http://tinyurl.com/yjr9y7g☜59C6EF
□
Accountability Mechanisms ill-suited for Network Style Dec-Making
Accountability Mechanisms ill-suited for Network Style Dec-Making☜The global network of decision-makers and practices for decision making that had evolved outpaced the capacity for accountability in the newly evolved network of participation in financial decision making.☜59C6EF
□
Global Savings Glut
Global Savings Glut☜Since 1996, developing countries shifted from being net users to being net suppliers of capital. This global savings glut lowered interest rates and helped inflate bubbles.☜59C6EF
□
Increased power of finance capital leading to rent-seeking behavior
Increased power of finance capital leading to rent-seeking behavior☜☜59C6EF
□
Natural financial dynamics of the baby boom generation
Natural financial dynamics of the baby boom generation☜Baby boomers bid up prices for homes and shares when incomes, accumulation of home equity and retirement savings were high in middle age, and then tried to downsize their homes and switch from shares to safer investments as they approach retirement.☜59C6EF
□
Graph of this discussion
Graph of this discussion☜Click this to see the whole debate, excluding comments, in graphical form☜dcdcdc
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