Analyse the Participants’ Rational and Irrational Behaviour before the Financial Crisis in 2008

Abstract

The subprime mortgage crisis that happened in 2008 in the U.S. contributed to a fnancial crisis all over the world. This crisis led to the bankruptcy in the Lehman Brothers and it took almost one decade for the U.S. to recover its economy. It is quite diffcult to apply traditional method to explain why there is a boom for house market, why investors choose to believe in the house market is a good choice for investment and why there is no mispricing correction during the boom period. This paper will attempt to solve these puzzles from the view of behavioural fnance. Explanations such as moral hazard, conficts of interest and prior neglect etc. will be mentioned to discuss the boom of the U.S. house market. Most arguments and conclusions are cited from rec-ognised papers or famous scholars such as Shiller, Gennaioli and Shleifer. Critical analysis will be presented to analyse the reasonability behind their arguments.