Neglected Risks: The Psychology of Financial Crises
نویسنده
چکیده
Financial crises are supposed to be rare events, yet they occur quite often. According to Reinhart and Rogoff (2009), investors suffer from “this time is different” syndrome, failing to see crises coming because they do not recognize similarities among the different pre-crisis bubbles. As a result, each crisis surprises investors. Economists typically model financial crises as responses to shocks to which investors attach a low probability ex ante, but which nonetheless materialize. Such shocks (sometimes referred to as “MIT shocks”; e.g., Caballero and Simsek 2013) are consistent with rational expectations in that investors recognize that there is a small chance that the shock might occur, but they are harder to reconcile with the Reinhart Rogoff observation that crises are not that unusual. The 2008 financial crisis in the US has deepened the challenge, by bringing up direct evidence that investor appreciation of the risks was not entirely rational. Coval, Jurek, and Stafford (2009) show that investors underestimated the probability of mortgage defaults in pricing mortgage backed securities. Foote, Gerardi, and Willen (2012) present direct evidence that investors did not even contemplate the magnitude of home price declines that actually materialized. Rather than being considered unlikely, the risks appear to have been entirely neglected. This evidence is part of a growing body
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