The Giant Pool of Money Analysis X

The Giant Pool of Money Analysis The housing crisis that occurred less than a decade ago is a great example, and has become an extensively covered case study, of how dangerous certain biases and heuristics can become if left unchecked on a massive scale. Alex Blumberg and Adam Davidson, in collaboration with NPR News, put together a special program titled “The Giant Pool of Money,” where they explore just how the phenomenon occurred and the underlying factors that contributed through sound bites of those directly involved, affected, or simply aware of the situation as it unfolded. Based on descriptions of various biases and heuristics in Judgment in Managerial Decision Making (Bazerman, 2009), the two biases that prolonged and strengthened the housing crisis in a significant manner can be seen in the “Ease of recall” bias stemming from the “Availability Heuristic,” as well as the “Anchoring” bias coming from the “Confirmation Heuristic.” Bazerman and Moore define the “ease of recall” bias as one where “individuals judge events that are more easily recalled from memory, based on vividness or recency, to be more numerous than events of equal frequency whose instances are less easily recalled.” The housing market and real estate had been doing quite well since the “Dot-com” boom and bust had rattled markets in the late 1990’s. Housing prices were continually increasing, and “lots of people in the mortgage industry had this faith that housing prices in the US simply never go down.” (Glass, 2008) This sort of reliance on historical performance of the housing market created a false sense of security for banks, where in the worst case scenario, the “bank would then own a house, which is now worth even more than what they gave out in the loan.” (Glass, 2008) In fact, this price trajectory accelerated shortly after the “Dot-com” bubble, so with regards to this availability heuristic, there is a clear time period where the assumption that prices will always increase

References: Bazerman, M. H. & Moore, D. A. (2009). Common biases. Chapter 2 of Judgment in Managerial Decision Making. New York: John Wiley & Sons. Glass, Ira. (Producer). (2008, May 9). Chicago Public Media [Audio podcast]. Retrieved from http://www.thisamericanlife.org/radio-archives/episode/355/The-Giant-Pool-of-Money