entrepreneurs: Entrepreneurs are people who take risks and, by and large, don’t know they are taking them. This happens with mergers and acquisitions, but it also happens at the level of small-scale entrepreneurs. In the United States, a third of small businesses fail within five years, but when you interview those people, they individually think they have between 80 percent and 100 percent chance of success. They just don’t know.

Greenspan’s admission to congress: He basically said that the framework within which we had been operating was false, and coming from Greenspan, that was impressive

[that financial institutions are rational agents.] That seemed to me to be ignoring not only psychology but also economics. He appeared to have a belief in the magic power of the market to discipline itself and yield good outcomes.

delusional optimism: The people who took on subprime mortgages were thoroughly deluded. One of the main ideas in behavioral economics that is borrowed from psychology is the prevalence of overconfidence. People do things they have no business doing because they believe they’ll be successful.

prospect theory: People [are] willing to gamble on in the hope of recovering their losses.

Daniel Kahneman, interview in Finance & Development for the IMF

Advertisements