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How a Bubble Stayed Under the Radar

This article, from the New York Times, covers the collapse of the housing market in 2008, and how information cascades helped cause that collapse. To briefly summarize, the financial crisis around 2008 was in part caused by the collapse of the housing bubble, to which many did not see coming. The lack of understanding the risk involved in the housing bubble allowed many to disregard any other risks in pursuing returns, thus resulting in such a consequence. In this article, Alan Greenspan tells of how he, and many others, saw the housing bubble on a local scale that couldn’t affect the overall economy in such a devastating way. It is important to note, however, that all of these people weren’t individual in their beliefs on the housing bubble, but were rather victims of “information cascades.” The article touches on the fact that the probability of making a right assessment is not 100% (in terms of the housing crisis), and Mr. Greenspan, among others, didn’t make an accurate judgement. This information was then passed on to others, who calculated his judgement into their own conclusions, and thus, an information cascade was born.

This article is closely related to what we’ve learned in class. Information cascades can greatly alter people’s beliefs and opinions (for the better or worse). In class, we calculated the probability of certain beliefs and the probability that given these beliefs, information cascades were in effect. We also discussed the point at which it is highly likely there is an information cascade and the point at which people are making decisions based off of their own observations. This article analyzed the information cascades in such a sense and related what we’ve learned in class to the housing bubble and following crisis.

 

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