Why Did so Many People Make so Many Ex Post Bad Decisions? the Causes of the Foreclosure Crisis

63 Pages Posted: 19 May 2012 Last revised: 4 Jun 2012

See all articles by Christopher L. Foote

Christopher L. Foote

Federal Reserve Bank of Boston

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2012

Abstract

We present 12 facts about the mortgage crisis. We argue that the facts refute the popular story that the crisis resulted from finance industry insiders deceiving uninformed mortgage borrowers and investors. Instead, we argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. We then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.

Suggested Citation

Foote, Christopher L. and Gerardi, Kristopher S. and Willen, Paul S., Why Did so Many People Make so Many Ex Post Bad Decisions? the Causes of the Foreclosure Crisis (May 2012). NBER Working Paper No. w18082. Available at SSRN: https://ssrn.com/abstract=2062715

Christopher L. Foote (Contact Author)

Federal Reserve Bank of Boston ( email )

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Kristopher S. Gerardi

Federal Reserve Bank of Atlanta ( email )

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HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

Paul S. Willen

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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