Question

Behavioral biases that impacted/created the Japanese Asset Price Bubble?

Answer 1

Below are some of the behavioural biases which led to Japanese Asset Price bubble:

1. Overconfidence: Japan was very confident in itself because it has done well even when the world has suffered financial crisis. The greater role of Japan in international financial markets and the large-scale takeovers of foreign companies by Japanese firms give them the feeling of becoming the great economy. Japanese firms were leading the world in manufacturing technology,including semiconductors, and the success of Japanese-style management was also one the factors which Japan thought that it could sustain such high growth without very high risk.

2. Loss Aversion Bias: The restrictions on fund-raising in the securities market by firms were removed from around 1980 and the bank became very concerned that major firms would become less dependent on them for funding. The deregulation of interest rates on deposits proceeded gradually,forcing banks to pursue such aggressive lending as loans to small firms backed by property and also property-related loans. These aggressive loan generating practices due to fear of loss had resulted in asset price bubble.

3. Confirmation bias: When the asset prices were booming there is tendency of people to believe that their belief was correct and other's viewpoint was wrong and followed herd mentality. This led to more people engaging in risk taking activities further exacerbating the bubble.

4. Illusion of Control bias: As more and more banks and people started trading excessive risks they were reeling under illusion of control bias. As they starts to believe that they can manage and control the outcomes but in reality they can't, which is evidenced by history then.

Please Like and Support!!