The Giant Pool of Money Case Analysis Essay

1033 Words Nov 27th, 2012 5 Pages
The Issues
The radio program draws an overall picture of the subprime mortgage crisis, how the subprime market was created, how the crisis happened, what were the result and its impact. (See appendix A - my summary of the case)
The primary issues in this case are: why did the Wall Street bankers blindly trust that the risky mortgages were good assets to invest into? And why did everyone involved allow the whole thing to go this far?

The Analysis
The Wall Street bankers ignored the fact that the mortgages were risky is mainly due to the confirmation bias, specifically, the Anchoring Heuristic.
Bazerman and Moore’s (2009) defines the Anchoring Heuristic as “Individuals make estimates for values based upon an initial value (derived
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The bankers paid attention to the increasing housing prices, but ignored the fact that the median household income stayed flat from 2000 to 2007. It was too late by the time a home cost nearly four times of an average family income and people started defaulting their payments did the bankers find out that the performance of those debts was extremely poor(Blumberg & Davidson, 2008).
If it were just Wall Street contributed to the problem, the crisis would not have gone thus far. The irrational escalation of commitment by multiple groups of people prior to the crisis put them into the irreversible situation, just like a train running without a break, it stops only when it crashes.
Bazerman and Neale define (1992) irrational escalation of commitment as “people continue a previously selected course of action beyond what rational analysis would recommend”. There are a few factors that made the crisis an irrational escalation of commitment.
The first factor is that the competitive irrationality happened within the small banks which purchased the risky mortgages from brokers. Competitive irrationality occurs when two parties act in a clearly irrational manner in terms of the expected outcomes (Bazerman & Neale, 1992). Mike Garner and his bank were under pressure by their competitors: if they did

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