Causes of the Foreclosure Crisis – Irrational or Rational Decisions?
Causes of the Foreclosure Crisis – Irrational or Rational Decisions?

Author(s): Bohuslava Doláková
Subject(s): Economic history, Transformation Period (1990 - 2010), Financial Markets, Socio-Economic Research
Published by: Masarykova univerzita nakladatelství
Keywords: Financial crisis; Behaviour; Consumer behaviour; Rationality; Irrationality;
Summary/Abstract: The aim of this paper is to show non-traditional approach to the causes of foreclosure crisis in 2008. Most often used story is based on idea that the crisis was result of the finance market industry where market insiders betrayed uninformed mortgage borrowers and investors. But non-traditional approach argues that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. They expected situation would have been much different than it was, but they knew theoretical risks. This can show limits of our understanding of asset price bubbles and help to design policies and help us in crisis prediction system.

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