[ExI] Psychology of markets explanations

[Stathis Papaioannou]

2009/6/4 Dan <dan_ust at yahoo.com>:

> So where would, for you, psychology enter into the discussion of, say, the current financial crisis in a way that would actually add something to the explanation?  Simply saying that had people changed their preferences is not enough in my view.  (Recall, too, the problem with an inflationary boom is not so much preferences as such as conditions that created contradictory expectations about preferences -- specifically that one can increase both consumption and savings at the same time.  (Artificially low interest rates or an increased money supply, initially, sets up the expectation that the supply of loanable is higher than it really is.  This simultaneously creates a disincentive to save (or lowers the incentive to save) and an incentive to spend and borrow.**))

Is it the belief that one can increase consumption and savings at the
same time or is it interest rates? Lower interest rates effectively
lower the cost the money, so more people borrow money, all else being
equal. But that doesn't give the full picture. There are many, many
other factors at play, not only irrational belief about spending and
saving but the bankers' belief that house prices will continue rising
or that complex derivatives can insure against catastrophic losses;
and these are all psychological factors, even if they can't as easily
be quantified or manipulated as interest rates.


-- 
Stathis Papaioannou