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(cid:2) (cid:2) (cid:2) (cid:2) The Global Financial Crisis and Its Aftermath (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) The Global Financial Crisis and Its Aftermath Hidden Factors in the Meltdown EDITED BY A. G. MALLIARIS, LESLIE SHAW AND HERSH SHEFRIN 1 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 1 OxfordUniversityPressisadepartmentoftheUniversityofOxford.Itfurthers theUniversity’sobjectiveofexcellenceinresearch,scholarship,andeducation bypublishingworldwide.OxfordisaregisteredtrademarkofOxfordUniversity PressintheUKandcertainothercountries. PublishedintheUnitedStatesofAmericabyOxfordUniversityPress 198MadisonAvenue,NewYork,NY10016,UnitedStatesofAmerica. ©OxfordUniversityPress2016 Allrightsreserved.Nopartofthispublicationmaybereproduced,storedin aretrievalsystem,ortransmitted,inanyformorbyanymeans,withoutthe priorpermissioninwritingofOxfordUniversityPress,orasexpresslypermitted bylaw,bylicense,orundertermsagreedwiththeappropriatereproduction rightsorganization.Inquiriesconcerningreproductionoutsidethescopeofthe aboveshouldbesenttotheRightsDepartment,OxfordUniversityPress,atthe addressabove. Youmustnotcirculatethisworkinanyotherform andyoumustimposethissameconditiononanyacquirer. LibraryofCongressCataloging-in-PublicationData Names:Malliaris,A.G.,editor. Title:Theglobalfinancialcrisisanditsaftermath:hiddenfactorsinthe meltdown/editedbyA.G.Malliaris,LoyolaUniversityChicago,Leslie Shaw,ChicagoPsychoanalyticSociety,HershShefrin,SantaClaraUniversity. Description:NewYork:OxfordUniversityPress,2016.|Includes bibliographicalreferencesandindex. Identifiers:LCCN2016008338|ISBN9780199386222(alk.paper) Subjects:LCSH:Financialcrises.|GlobalFinancialCrisis,2008–2009.| Economicpolicy.|Socialjustice. Classification:LCCHB3722.G58562016|DDC330.9/0511–dc23LCrecordavailableat http://lccn.loc.gov/2016008338 1 3 5 7 9 8 6 4 2 PrintedbyWebCom,Inc.,Canada (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) CONTENTS PrefaceandAcknowledgments xiii Contributors xv PART ONE Introduction 1. TheGlobalFinancialCrisisandItsAftermath 3 A.G.Malliaris,LeslieShaw,andHershShefrin Introduction 3 AMultidisciplinaryMethodology 5 OrthodoxEconomicsandFinancialCrises 6 AClassicFinancialPanic 8 ContributionsfromEconomics 9 ContributionsfromPsychology 15 Values 18 Epilogue 21 References 21 PART TWO TheGlobalFinancialCrisisof2007–2009andEconomics 2. FromAssetPriceBubblestoLiquidityTraps 25 A.G.Malliaris Introduction 25 PurposeofThisChapter 26 WhatIsFinancialInstability? 30 Methodology 35 TheRecentGlobalFinancialCrisis 38 TheExpansionPhase 39 TheUpperTurningPeriod 45 TheGreatRecessionof2007–2009 48 TheLiquidityTrap:TheLowerTurningPeriod 49 Conclusions 52 Notes 53 References 53 3. AMinskyMeltdown 57 JanetYellen MinskyandtheCurrentCrisis 57 BubblesandMonetaryPolicy 60 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) vi CONTENTS AnotherImportantToolforFinancialStability 63 Notes 64 4. ModelingFinancialInstability 67 SteveKeen Introduction 67 LoanableFundsvs.EndogenousMoney 68 AMonetaryModelofLoanableFunds 69 AMonetaryModelofEndogenousMoney 75 Occam’sRazorPassesEndogenousMoneyandFailsLoanableFunds 78 SimulatingLoanableFundsandEndogenousMoney 78 ModelingFinancialInstability 81 EmpiricalData 86 Conclusion 88 Appendix 89 LoanableFundsModel 89 EndogenousMoneyModel 89 Goodwinmodel 91 MinskyModel(NewandModifiedEquationsOnly) 92 CommonParameterstoGoodwinandMinskyModels 92 Minsky 92 Notes 98 References 100 5. AssessingtheContributionofHymanMinsky’sPerspectivetoOur UnderstandingofEconomicInstability 104 HershShefrin Introduction 104 EightElementsinMinsky’sPerspective 105 MinskyandFCICJuxtaposed 108 PsychologyinMinsky’sPerspective 123 ExcessiveOptimism 123 Overconfidence 124 Aspiration-BasedRiskSeekingandAversiontoaSureLoss 125 ConfirmationBias 126 Representativeness 126 ReactiontoMinsky’sWork 126 DiversePerspectives 127 LackofContagion,Self-Interest,andConfirmationBias 130 Conclusion:Self-InterestColoredbyConfirmationBias 133 Appendix 134 Notes 136 References 139 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Contents vii 6. PreludetotheGlobalFinancialCreditCrisis 143 JohnSilvia TheThingsWeTakeforGranted—andTheirEconomicImplications 143 SecularShiftsMaskedbyShort-TermEconomicProsperity 144 PushingtheCreditEnvelope 149 HomePricesFailtoMeetExpectations:TheEconomicShock 151 FeedbackfromtheChange:ChangeBegetsCreditRevulsion 152 FeedbackfromtheChange:ImpactontheLaborMarket 153 EconomicGrowthwithoutaLaborMarketRecovery 153 AnAlteredFrameworkfortheLaborMarket 154 TheReservationWageModel 156 LegacyofaDisparateLaborMarketaftertheCreditCrisis 158 DurationofUnemployment:NoSignofRecoveryforManyWorkers 158 APermanentDropintheEmploymentRatio? 161 RegionalDisparitiesReflectIndustryConcentrations 163 NewAmericanPhenomenon:ConstrainedWorkerMobility 165 The“Mancession,”the“Mancovery,”andIndustryMix 165 WhereRaceandEthnicityMatter 167 ParticipationRates:OlderWorkersStayLonger,Younger WorkersQuit? 167 UnequalEducation=UnequalRecession 168 DualReturnstoEducation:HigherIncomeandLowerUnemployment 169 HardRealities:FewerJobsforthe20th-CenturyWorkerinthe 21stCentury 170 ShowMetheMoney:WagesandHours 171 IncomeGrowth:StillbelowPre-RecessionPace 171 AMonetaryPolicyDisconnect? 171 Conclusion 174 Notes 175 7. MathematicalDefinition,Mapping,andDetectionof(Anti)Fragility 177 NassimNicholasTalebandRaphaelDouady Introduction 177 WhatIsFragility? 177 FragilityasSeparateRiskfromPsychologicalPreferences 179 DetectionHeuristic 181 FragilityandTransferTheorems 182 Tail-VegaSensitivity 182 MathematicalExpressionofFragility 185 DefinitionofFragility:TheIntrinsicCase 186 DefinitionofFragility:TheInheritedCase 186 ImplicationsofaNonlinearChangeofVariableontheIntrinsicFragility 187 Theorem1(FragilityTransferTheorem) 188 Proof 188 Theorem2(FragilityExacerbationTheorem) 189 Discussion 190 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) viii CONTENTS Monomodalcase 190 ScalingParameter 190 FragilityDrift 191 Second-OrderFragility 191 DefinitionsofRobustnessandAntifragility 192 DefinitionofRobustness 192 ExampleofRobustness(Barbells) 193 DefinitionofAntifragility 193 Remarks 194 ApplicationstoModelError 195 Case1:ApplicationtoDeficits 196 ModelErrorandSemi-BiasasNonlinearityfromMissedStochasticity ofVariables 197 ModelBias,Second-OrderEffects,andFragility 197 TheFragility/ModelErrorDetectionHeuristic(Detectingω andω A B whenCogent) 198 TheHeuristic 199 PropertiesoftheHeuristic 199 ComparisonoftheHeuristictoOtherMethods 200 FurtherApplications 200 Acknowledgments 201 References 201 PART THREE TheGlobalFinancialCrisisof2007–2009andPsychology 8. TheVarietiesofIncentiveExperience 205 RobertW.Kolb Introduction 205 TheRangeofIncentives 206 ATaxonomyofIncentives 210 Conclusion 222 Notes 222 References 223 9. GoalsandtheOrganizationofChoiceunderRiskinBoththeLongRun andtheShortRun 226 LolaLopes TheExceedinglyLong(andMostlyUnexamined)HistoryofThoughton RiskyChoice 227 DistributionalThinking:RuinandSafety-First 228 ModelingDistributionalThinking 229 GamblingWhenYouMust:AspirationandBoldPlay 231 DemonstratingSecurity-PotentialandAspirationLevelintheLab 232 ConcludingThoughtsontheImportanceofApplication 236 References 238 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Contents ix 10. TheTopologyofGreedandFear 240 GracielaChichilnisky Introduction 240 BackgroundandExamples 243 TwoApproachestoDecisionTheory 244 TheTopologyofFearandtheValueofLife 246 HowPeopleValueTheirLives 246 GerardDebreuandtheInvisibleHand 247 TheAxiomofChoiceandRareEvents 248 RepresentingaPurelyFinitelyAdditiveMeasure 248 Appendix 250 Arrow’sDefinitionofMonotoneContinuity(MC) 250 ∗ TheDualSpaceL∞ 252 Notes 251 References 254 11. ASustainableUnderstandingofInstabilityinMindsandMarkets 257 LeslieShaw Introduction 257 PartOne:ThePsychology-PsychoanalysisDivide 261 PartTwo:IrrationalityasaPsycho-PhilosophicalProblem 266 PartThree:ASustainableUnderstandingofInstability 269 Notes 274 References 277 12.ExistenceofMonopolyintheStockMarket 279 ViktoriaDalko,LawrenceR.Klein,S.PrakashSethi,andMichaelH.Wang Introduction 279 ExistenceofMonopolisticTendenciesintheStockMarket 281 ComparisonbetweenMonopolyPowerintheFinancial,andtheGoods andServicesMarkets 282 MarketManipulationisWidespread,Frequent,andOccasionally Rampant 284 AModelofanInformation-BasedManipulativeTradingStrategy 285 TheSet-UpoftheModelandRelatedLiterature 285 TheModelandResults 287 DiscussionoftheResults 292 UnderWhatConditionsCantheStrategicTraderProfitfrom Information-BasedManipulation? 292 UndertheAboveConditions,DothePerception-GuidedInvestorsRealize GainorLoss? 293 WhatIstheSourceofThoughtContagion,Leadingtothe Perception-GuidedInvestors’Herding? 294 WhyDoPositiveReturnsReverseaftertheAnnouncementof GoodNews? 294 (cid:2) (cid:2) (cid:2) (cid:2)

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In The Global Financial Crisis, contributors argue that the complexity of the Global Financial Crisis challenges researchers to offer more comprehensive explanations by extending the scope and range of their traditional investigations. To achieve this, the volume views the financial crisis simultane
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In The Global Financial Crisis, contributors argue that the complexity of the Global Financial Crisis challenges researchers to offer more comprehensive explanations by extending the scope and range of their traditional investigations. To achieve this, the volume views the financial crisis simultane

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