Saturday, July 10, 2010

Federalist Society Journal on the 2008 Crisis

The Spring Issue of the Harvard Journal of Law and Public Policy has many good articles on the economic crisis of 2008. It's pretty good. I really liked Arnold Kling's article, which argues the crisis was the result of a cognitive error--that home mortgages weren't risky irrespective of obligor risk--due to a confluence of factors: complexity, good intentions, regulations, simple carelessness.

Yet, he states this "may be our first epistemologically‐driven depression [ie, they didn't understand what they were doing]". I'm not so sure. The internet bubble of the 1990's also contained a lot of pervasive misconceptions that with hindsight are obvious.


Dave said...

I think you're right. I think in both cases (the dot-com bubble and the mortgage bubble) there were many participants who were aware that they were participating in a bubble but thought they could get out before it burst.

OT Eric, any thoughts on Michael Spence's op/ed in yesterday's FT?

J said...

Why "cognitive error"? What is an "epistemologically-driven depression"?

Cognitive errors or bias are caused by our mind's wiring or mechanisms, like optical illusions, but I cannot see how the working of our minds caused the crisis. Imagining that creatively packaging mortgages allows you to ignore the issue of repayment is a simple error of judgment. A look at the people who was receiving the loans would have revealed that giving them money and expecting to be repaid was insane. But who leaves the airconditioned office to go out to the streets in this weather?

Regarding the epistemologycal crisis, your blog is (was?) exceptional because of your lack of pomposity. Have you returned to the academy?

Anonymous said...

Moral failure or cognitive failure - a dinstinction without a difference? All it takes is rationalisation, which humans are extremely good at doing, to convert the former to the latter.