Fearing Losses: The Psychology of the Credit Crunch

The recent market turmoil is ultimately a psychological phenomenon that has had economic consequences, rather than the other way around. In this brief, we discuss the mental mechanisms that underpin the panic that has gripped investors, lenders, and consumers alike and thereby generated the current recession. In the process, we demonstrate the fundamental flaws in the risk management practices hitherto used by banks and insurers, and the risk measurement techniques used by financial advisors.

Fearing Losses: The Psychology of the Credit Crunch