How bankers believed their own hype. (2013)

“..groupthink and wishful thinking pose the biggest risks in finance, not deliberate malevolence. Investors – and bankers – should read this Princeton research, and stand warned.

Gillian Tett
ft.com, 22 March 2013

“It’s hard to imagine that any banker close to the mortgage market in 2006 could have failed to spot the excesses; or that anyone repackaging those loans into bonds … “securitising” them… did not spot the risks.

“But last week economists at Princeton and Michigan issued some startling new research …. if you look at the personal financial decisions of the bankers involved in securitisation in that period, it seems many believed their own hype…..

“Many not only bought large quantities of housing stock at the worst possible moment (ie. in 2005 and 2006), but also did so in some of the most “bubbly” markets, such as southern California. They then failed to sell those properties in time – and thus were left nursing losses after 2007…..

“The results show (once again) that it is a mistake to devise economic theories on the basis of the ‘rational’, all-seeing man; cognitive biases and groupthink are crucial in explaining how markets work and overshoot.”

Read the full article here: How bankers believed their own hype