1
Behavioral Finance 2020-21
Econ 412
School
, 2
Behavioral finance the global financial crisis in the late 2000s
The global financial crisis in the late 2000s began from the United States. The crisis
sprung from the supply side with the mortgage lending market after the Federal Home Loan
Mortgage Corporation reached a decision that it would stop buying high-risk mortgages.
Consequently, the New Century Financial Corporation, one among the leading credit lenders
filed for bankruptcy (Pistor, 2010). Shortly after, the large financial institutions in the US began
to collapse as the crisis became worse. It was not long before the crisis that began in the US
quickly spread to other economies, including other major economies like Europe (Pisani-Ferry &
Sapir, 2010). As the crisis spread to Europe and other countries, several countries began
restructuring and reviewing bank supervision, management and regulation. The concerns were
majorly issues of bank liquidity, capital and corporate structure (Mülbert & Wilhelm, 2011). This
crisis constituted a financial bubble of unprecedented proportion.
In a broad definition, a bubble takes place when asset prices rise up way above and
beyond what is justified by underlying fundamentals and principles that would support their rise,
sustenance and/or fall (Mayer & Sinai, 2009). Some of these fundamentals include those that
determine the profitability of a business or not. Expectations of growth are exaggerated and
emotions with hype are overblown, as what was exhibited in the global financial crisis.
Behavioral finance is a recent approach to financial markets analysis, that’s partially in
response to the difficulties that are faced in trying to understand financial/economic phenomena
that traditional paradigm fails to decipher (Shiller, 2002). This paper examines the link between
behavioral biases particularly the mental accounting bias, disposition effect and the
Behavioral Finance 2020-21
Econ 412
School
, 2
Behavioral finance the global financial crisis in the late 2000s
The global financial crisis in the late 2000s began from the United States. The crisis
sprung from the supply side with the mortgage lending market after the Federal Home Loan
Mortgage Corporation reached a decision that it would stop buying high-risk mortgages.
Consequently, the New Century Financial Corporation, one among the leading credit lenders
filed for bankruptcy (Pistor, 2010). Shortly after, the large financial institutions in the US began
to collapse as the crisis became worse. It was not long before the crisis that began in the US
quickly spread to other economies, including other major economies like Europe (Pisani-Ferry &
Sapir, 2010). As the crisis spread to Europe and other countries, several countries began
restructuring and reviewing bank supervision, management and regulation. The concerns were
majorly issues of bank liquidity, capital and corporate structure (Mülbert & Wilhelm, 2011). This
crisis constituted a financial bubble of unprecedented proportion.
In a broad definition, a bubble takes place when asset prices rise up way above and
beyond what is justified by underlying fundamentals and principles that would support their rise,
sustenance and/or fall (Mayer & Sinai, 2009). Some of these fundamentals include those that
determine the profitability of a business or not. Expectations of growth are exaggerated and
emotions with hype are overblown, as what was exhibited in the global financial crisis.
Behavioral finance is a recent approach to financial markets analysis, that’s partially in
response to the difficulties that are faced in trying to understand financial/economic phenomena
that traditional paradigm fails to decipher (Shiller, 2002). This paper examines the link between
behavioral biases particularly the mental accounting bias, disposition effect and the
