Giant Pool of Money
In the story presented on the thematically.Org describes the process and the behavior patterns of parties involved.Mike Francis, Moody, and Standard and Poor represent the lending or investors side.
When Mike Francis devised the mortgage backed securities which gave birth to Cods Investors jumped onto these securities based on AAA ratings given to these securities by rating agencies such as Moody, and Standard and Poor. These rating agencies did collect lot of data which were barely few years old. They did not have enough relevant and good quality data and collected data was simply to enough.
These rating agencies used their preexisting theory – houses don’t lose value In America – to Interpret the evidences that the performance of these securities were AAA (Heath, et al. 1998). Individuals use their preexisting theories to Interpret the evidence (Heath, et al. 1998) is a bias which played a major role here. The investors from the global pool of money jumped in with all guns for these securities. As demand grew more and more these mortgages were bought and more and more securities were created to investors. The entire process showed a confirmation bias.
People who took risky adjustable loans to buy houses which they really could not afford were essentially following other people. Since most of the people were buying houses by taking these loans, it made sense for other to replicate the act. Calling explains, In his book Influence Since and Practice (5th edition), this behavior as “the principle of social proof”. This principle states that we determine what Is correct by finding out what other people this Is correct (Lund et al. , 2007). Before 2000 most of people with low Income and low credit score were not able to afford buying the kind f house they bought during the period after 2000.
In the radio program “Giant Pool of Money”, case of Clarence Nathan is presented. Clarence works 3 jobs, did not made good income and had bad credit rating. “l wouldn’t lend to myself” said Clarence. Even then he took the loan because everyone else was talking these kinds of loans and in fact the loan was made available to him. Even the behavior of investors, banks, and Wall Street followed the same pattern. Early on, investment banks were not interested in risky mortgages but when one bank started buying hose supreme mortgages others Jumped in. It was acceptable to invest in supreme mortgages.