Behavioral finance: the global financial crisis in the late 2000s

Roy A.

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Behavioral finance: the global financial crisis in the late 2000s

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Consumer behavior, financial analysis, financial crisis, europe, USA United States of America

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The global financial crisis in the late 2000s began from the United States. The crisis sprung from the supply side with the mortgage lending market after the Federal Home Loan Mortgage Corporation reached a decision that it would stop buying high-risk mortgages. Consequently, the New Century Financial Corporation, one among the leading credit lenders filed for bankruptcy (Pistor, 2010). Shortly after, the large financial institutions in the US began to collapse as the crisis became worse. It was not long before the crisis that began in the US quickly spread to other economies, including other major economies like Europe (Pisani-Ferry & Sapir, 2010). As the crisis spread to Europe and other countries, several countries began restructuring and reviewing bank supervision, management and regulation. The concerns were majorly issues of bank liquidity, capital and corporate structure (Mülbert & Wilhelm, 2011). This crisis constituted a financial bubble of unprecedented proportion.

Mental Accounting Effect during the 2008 Financial Crisis
Disposition Effect during the 2008 Financial Crisis
US Housing bubble (2001-2005) - Leading to the 2008 Crisis (Overconfidence bias)
Winners, Losers and Effects

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[...] This essentially confirms the disposition effect. Numerous researchers have carried out this analysis and have shown a strong tendency of disposition effect in the 2008 financial crisis particular with private investors in the Chinese and American markets. US Housing bubble (2001-2005) - leading to the 2008 crisis (Overconfidence bias) Overconfidence bias is basically the tendency for humans to be more confident about the superiority of their own abilities/interpretations/decisions. A famous quote by the New York Times stated that "If you believe that you are not impacted by over confidence you are probably overconfident". [...]

[...] (2009). US house price dynamics and behavioral finance. Policy Making Insights from Behavioral Economics. Boston, Mass: Federal Reserve Bank of Boston. Ackert Lucy F. & Deaves Richard (2010). Behavioural finance psychology, decision-making, and market. South-Western. Mayuresh Kondeti S , Antariksh (2018). A Behavioral Finance Perspective of the 2008 Financial Crisis: Published on February 13, 2018 Mülbert, P. O., & Wilhelm, A. [...]

[...] This further increased the risk of the positions held by the financial institutions. This led to the majority of the risky investment account crashing when the bubble burst. This generated a spiraling negative circular feedback (Lind, 2009) Disposition Effect during the 2008 Financial Crisis The behavioral economic theory of the disposition effect states that an investor has the tendency to sell off his winning investment quicker than their losses. In essence, they hold on to their losses much longer. This behavior can best be further described by prospect theory or loss aversion. [...]

[...] This means that while the effects always last for generations, the self-correcting ability of the markets and individuals always exceed any impact. References Lind, H. (2009). Price bubbles in housing markets: Concept, theory and indicators. International Journal of Housing Markets and Analysis. Shiller, R. J. (2002). Bubbles, human judgment, and expert opinion. Financial Analysts Journal, 18-26. Rudd, K. [...]

[...] (2009). The global financial crisis. Monthly, The, (Feb 2009), 20-29. Levitin, A. J., & Wachter, S. M. (2011). Explaining the housing bubble. Geo. LJ 1177. Mayer, C., & Sinai, T. [...]

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