Question

What is the irrational behavior (each type) that caused the mortgage crisis?

Answer 1

Types of irrational behaviour that caused the mortgage crisis are as follows-

A. Irrational exuberance- investors were getting carried away by the Asset bubble and they were invested into the housing market and they believed that these markets are going to go higher.

B. Cognitive bias- there were decision making which were completely based upon the irrational decisions and they were justifying the valuations at any level.

C. Herding effect was also visible during the mortgage crisis in which investors were following each other and there was following of the wisdom of the crowds.

D. There was lack of control and we wear consuming more than we should have consumed out of the housing market because we were completely exploiting the house market for borrowing at terrible conditions

E. There were discrimination against those people who were trying to short the market because these people generally made a lot of money when the market collapsed and all these insurance companies and investment banker had written contract of these shorters.

F. Sunk cost fallacy- there was an attachment to the past spending which could easily be visible as people were not getting out of their past spending and they were stuck in their investment.