Organizations and Markets

Sid Winter on the Crisis

14 May 2009 at 9:24 am Peter G. Klein 1 comment

| Peter Klein |

From a short piece at Knowledge@Wharton:

As computers have grown more powerful, academics have come to rely on mathematical models to figure how various economic forces will interact. But many of those models simply dispense with certain variables that stand in the way of clear conclusions, says Wharton management professor Sidney G. Winter. Commonly missing are hard-to-measure factors like human psychology and people’s expectations about the future, he notes.

Among the most damning examples of the blind spot this created, Winter says, was the failure by many economists and business people to acknowledge the common-sense fact that home prices could not continue rising faster than household incomes.

Says Winter: “The most remarkable fact is that serious people were willing to commit, both intellectually and financially, to the idea that housing prices would rise indefinitely, a really bizarre idea.”

Presumably Sid is referring here to some kind of behavioral anomaly, but what I see is the standard malinvestment story from Austrian business-cycle theory. Even investors with rational expectations, who know that a credit-induced artificial boom can’t last forever, won’t know exactly when the bubble will burst, and can profit from taking advantage of artificially low interest rates while they last.

Entry filed under: - Klein -, Financial Markets, People.