Explaining Bubbles

Behavioral economics does a much better job than the standard models:

By borrowing the insights and methods of psychology, behavioral economics focuses on all the ways in which humans fail to act as the rational, self-interested beings that economic models call for – we aren’t good at thinking about the future, we’re susceptible to peer pressure, we overestimate our abilities and underrate the odds of bad things happening. It’s a set of traits that describes perfectly the behavior of many of the people who, in a cascade of self-defeating decisions, helped create the subprime crisis.

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