Why Do We Miss Early Warning Signs of Economic Crises?

33 Pages Posted: 20 Aug 2015

See all articles by Chris Yung

Chris Yung

University of Virginia - McIntire School of Commerce

Date Written: August 20, 2015

Abstract

This paper shows that agents underreact to rare and extreme signals. Agents observing these signals choose delay, hoping to condition their behavior on future actors (who may themselves also delay). This stalemate prevents society from recognizing the presence of rare states, even when the relevant signals are widely distributed across agents. Instead, rare signals accumulate privately (and redundantly) until they become overwhelming, after which they are all simultaneously revealed in a burst.

Keywords: Crises, fragility, herding, tail events

JEL Classification: G32

Suggested Citation

Yung, Chris, Why Do We Miss Early Warning Signs of Economic Crises? (August 20, 2015). 28th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=2648443 or http://dx.doi.org/10.2139/ssrn.2648443

Chris Yung (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-242-0836 (Phone)

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