Question

How does overconfidence lead to bubbles?

Answer 1

The origin of economic crisis of 2008 was actually formed initially in the form of housing bubble. In the mid-year of 2008, due to credit crisis aroused, the asset price of the assets has rose to unexpected level. The people who actually borrowed the money to acquire the asset has caught with the evil hands of the debt. The housing bubble has caused the economic crisis due to unprecedented high value of the assets and also it had indirect bad impact on mortgage assets values, real estate assets and also retail outlets fields too.

But in the same time, Anticipating of increase in appreciation of the bought assets leads to creation of overconfidence among customers. Increase in the price volatility has direct proportion of the demand for the highly payable houses when it has been placed for the sale in the period of housing bubble situation. But the economists suggested that overconfidence of future increase in the appreciation of assets will lead to debt crisis. And also the indifferent assets rate among all the states also urged the buyers to have overconfidence to buy the assets. When price of the housing asset in one state is differs lesser than the other asset price of other state, it will urges the customers to buy the assets and expect the huge appreciation in the future. But the overconfidence mentality of the customers leads to housing bubble crisis as they caught into trouble of paying with higher rate of interest.