Decision Making Analysis
Situational Factors:
Potential for a big gain
Low Fed Funds rate 1% vs low-risk high-return 5-9% mortgages investment
Certainty delusion
All the data reviewed on loans, years ago, was positive and performed very well.
Psychological Factors:
Confirmation bias
Housing prices were rising, fast. The faith in US housing prices never go down.
Even if the worst happens and someone defaults, the bank would then own the house which is now worth even more than when they gave out the loan.
Psychological attachment to others decision
Once one investment bank bought the loan, all the rest of them follow suit.
Social Factors:
External-justification- need to maintain reputation and show off in a fancy luxury life.
Glen Pizzolorusso didn't worry about if the loans were good but he’s luxury life
Peers willingness:
Mike Garner’s staff complained of some loans they were not allowed to offer.
Organizational Factors:
Pressure to meet the market needs
The Wall Street is under pressure to loosen the guidelines to find more people to take out mortgages, lending to people who never would’ve qualified before.
The CDO faced the pressures to loosen standards, to make CDOs out of lower and lower rated pools.
Decision Heuristics - Anchoring & Adjusting on “foreclosure rates remain fairly low”
Wall Street forecast the foreclosure rates based the number on past year’s data – as the anchor point. They figured absolute worst-case scenario based on the historical foreclosure rate is generally below 2%. Taking this as anchor points, they estimated a foreclosure rate of 8% or 10% or even 12%. But the historical data was irrelevant and meaningless. All these new kinds of mortgages were given out to people who never would have gotten them before. Some mortgage pools today are expected to go beyond 50% foreclosure rates.
Decision Heuristics – Confirmation Bias on “housing prices would