During summer 2008 I was working for a large European multinational corporation and it is amazing how quickly we realized that all our businesses in most different industry segments and all around the world were worryingly slowing. Some months later during an evening dinner I was talking around the table with colleagues from Mexico, US, North and East Europe and we were sorrowfully discussing what we all went though during the Big Global Recession: restructuring, temporary and permanent layoffs, cost reduction programs. And we were not Finance or Real Estate guys... Not at all.
I think that whatever job we had we will remember forever those days.
Therefore it is so important to understand what ultimately caused US house bubble and later the big recession. It is even more important to realize whether this may happen again and how we may eventually avoid it. Especially because, according traditional economics, this could never have happened.
Barberis short and effective summary confirms there is definitely something else to consider.
Personally I am fascinated with this branch of research but before diving into Psychology we should not forget macroeconomics scenario and technical innovations that settled the battleground.
On one hand globalization, free trade agreements and IT innovations challenged and transformed western economies. As explained by Carl Icahn in his beautiful lesson, we lived a kind of new Golden Age.
On one side lots of new services and products (the web, high bandwidth networks, iphones, etc..) on the other hand cheap daily products from low-cost countries.
We did loose lots of traditional jobs but while we were living a very unusual miracle: a “wealthy” low-inflation deindustrialization process.
This was possible because with no risk of inflation governments and central banks injected lots of liquidity into the system. As any over-pressurized pipeline sooner or later fails or explodes, excess liquidity had to blow and burst a bubble somewhere. In the past was gold, bonds or tulips… This time was housing.
Then powerful financial technical innovations in mortgage securities amplified the bubble by dividing, mixing, sharing, reselling and hiding “under the carpet” risks . This was possible only because of absent, distracted and therefore guilty regulators
Having said about macroeconomics context and dangerous innovations, psychology acts as a powerful “amplifier” during all three phases.
When prices surge we are irrationally blinded by past “patterns” (what happened yesterday and before yesterday will happen tomorrow as well).
When we assess and evaluate risks we are inevitably conditioned by people, bosses, colleagues and our own fears and we easily end up with a nice “internal” story to justify our decisions and actions (I believe same thing happened in Nazi Germany).
Finally when things get nasty and difficult, brain-wired ancestral “fight or fly” strategy takes over. We get scared and we definitely fly … and sell.
After all we are just and simply humans with limited time resources (and not rational microcomputers). How we could possibly evaluate and discount economic impacts of each decision and actions we take ?
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