The Giant Pool of Money Analysis
Every individual in the United States wishes to be a homeowner because owning a home is considered as the ultimate achievement by majority of the population and is a symbol of successful and fulfilling life (Grant, Rick). So in the early 2000s when individuals were provided an extremely easy way of getting a loan and buying a home irrespective of their job and background, majority of them grabbed the opportunity. But, this scheme of simplifying mortgage rules and procedures led to overvaluation of mortgages based on an assumption that housing prices will continue to escalate led to the financial crisis of 2008 (Blumberg and Davidson). One of the biggest issue during crisis was that the decisions made around …show more content…
I believe there were two biases that had the most significant impact on the mortgage crisis. One that was most clearly visible in The Giant Pool of Money podcast is the confirmation trap. Bazerman and Moore explain confirmation trap as, “When we encounter information that is consistent with our beliefs, we usually accept it with an open mind and a glad heart instead of questioning the validity of it.”. It means that when we have a certain stand about something, we just accept it as true and ignore any facts that may prove us wrong. Same happened during the great financial crisis of 2008 (Blumberg and Davidson). All the mortgage brokers mentioned in the podcast were only interested in making profits by helping individuals get a mortgage and then they bundled those mortgages and sold them to investors and big financial institutions such as Morgan Stanley. All the rules related to home mortgages were changing and no one was questioning them. Mike Garner who was a broker at Silver State Security said that his boss hated the loans they offered but were forced to keep doing it because everyone else was doing it (Blumberg and Davidson). So instead …show more content…
Alex Blumberg stated that “It 's easy to ignore your gut fear when you 're making a fortune in commissions.”, which might have been true for most brokers, but Mike Francis was an experienced broker. So in an attempt to make sense of what was going on, he decided to crunch some data and ensure that there was minimal risk associated with these stated income loans and no income no asset (NINA) loans. He reviewed a lot of historical data and most of it looked positive and promising. Using that data, he concluded that even in the worst case scenario the rate of foreclosures would not go above 12%. But, the problem was that this was old data. This data belong to the group of people who were given loans based on their credit history and job situation. But, the mortgages today were given to anyone without checking their income or assets status. Hence, most of this data was irrelevant and was proved so when Adam Davidson stated that most of the mortgage pools at the time were expected to go beyond 50% foreclosure rate (Blumberg and Davidson). If Mike Francis would have thought about these other external factors and incorporated them to make adjustments to his anchors instead of just relying on the historical data, maybe he would have foreseen the crisis that was about to hit
Every individual in the United States wishes to be a homeowner because owning a home is considered as the ultimate achievement by majority of the population and is a symbol of successful and fulfilling life (Grant, Rick). So in the early 2000s when individuals were provided an extremely easy way of getting a loan and buying a home irrespective of their job and background, majority of them grabbed the opportunity. But, this scheme of simplifying mortgage rules and procedures led to overvaluation of mortgages based on an assumption that housing prices will continue to escalate led to the financial crisis of 2008 (Blumberg and Davidson). One of the biggest issue during crisis was that the decisions made around …show more content…
I believe there were two biases that had the most significant impact on the mortgage crisis. One that was most clearly visible in The Giant Pool of Money podcast is the confirmation trap. Bazerman and Moore explain confirmation trap as, “When we encounter information that is consistent with our beliefs, we usually accept it with an open mind and a glad heart instead of questioning the validity of it.”. It means that when we have a certain stand about something, we just accept it as true and ignore any facts that may prove us wrong. Same happened during the great financial crisis of 2008 (Blumberg and Davidson). All the mortgage brokers mentioned in the podcast were only interested in making profits by helping individuals get a mortgage and then they bundled those mortgages and sold them to investors and big financial institutions such as Morgan Stanley. All the rules related to home mortgages were changing and no one was questioning them. Mike Garner who was a broker at Silver State Security said that his boss hated the loans they offered but were forced to keep doing it because everyone else was doing it (Blumberg and Davidson). So instead …show more content…
Alex Blumberg stated that “It 's easy to ignore your gut fear when you 're making a fortune in commissions.”, which might have been true for most brokers, but Mike Francis was an experienced broker. So in an attempt to make sense of what was going on, he decided to crunch some data and ensure that there was minimal risk associated with these stated income loans and no income no asset (NINA) loans. He reviewed a lot of historical data and most of it looked positive and promising. Using that data, he concluded that even in the worst case scenario the rate of foreclosures would not go above 12%. But, the problem was that this was old data. This data belong to the group of people who were given loans based on their credit history and job situation. But, the mortgages today were given to anyone without checking their income or assets status. Hence, most of this data was irrelevant and was proved so when Adam Davidson stated that most of the mortgage pools at the time were expected to go beyond 50% foreclosure rate (Blumberg and Davidson). If Mike Francis would have thought about these other external factors and incorporated them to make adjustments to his anchors instead of just relying on the historical data, maybe he would have foreseen the crisis that was about to hit