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Decision-Making during the Housing Boom

  • Daniel Aronoff

Abstract

Do people pursue their self-interest? The discipline of economics is founded upon the belief that they do. Adam Smith laid down the fundamental premise thus:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities but of their advantages.3

This “Smithian” premise seems at odds with behavior during the housing boom, where so many homebuilders, bankers, mortgage borrowers, and investors lost vast sums of money in a speculative frenzy that drove up home prices and home construction to levels that, in retrospect at least, appear to have been recognizably unsustainable. It is reminiscent of notorious speculative excesses of the past, like the South Sea Bubble of the early 1700s, where the share price of a British chartered monopoly company rose to a spectacular height and took in the leading investors of the day before collapsing; or the Dutch “tulip mania” of 1637, where some single tulip bulbs sold for more than ten times the annual income of a skilled craftsman. One might conclude that people went a little nuts during the housing boom.

Keywords

Mortgage Loan Financial Exchange Security Price Money Manager Market Financing 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

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    Martin Wolf, The Shifts and the Shocks (New York: Penguin Press, 2014), p. 146.Google Scholar
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© Daniel Aronoff 2016

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  • Daniel Aronoff

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