The instability of the human mind led to the formation and sheer magnitude of the 2008 global financial crisis, according to a new book co-edited by Quinlan professor A. G. (Tassos) Malliaris, and published by Oxford University Press.
This unprecedented hypothesis is explored through 21 chapters written by leading thinkers, including Federal Reserve Chair Janet Yellen, behavioral finance pioneer Hersh Shefrin, and Nassim Taleb, author of the New York Times best-seller Black Swan: The Impact of the Highly Improbable.
The book, The Global Financial Crisis and Its Aftermath: Hidden Factors in the Meltdown, focuses on three factors that intensified the meltdown—economic, psychological, and social values.
Here, Malliaris talks about the book and his belief that businesses should ground their success in doing the right thing.
As an economist and professor, it’s my responsibility to examine what caused the global financial crisis and how economies should function to prevent another crisis of this magnitude.
With funding from the Chicago Mercantile Exchange Group, my colleagues and I organized an April 2013 conference that brought together experts to investigate the global financial crisis from the perspective of behavioral finance and ethical values. At the urging of the Oxford University Press, my colleagues and I decided to use 11 papers from the conference as a starting point, and continue our research to create an innovative book about the crisis.
The origin of the global financial crisis is rooted in irresponsible mortgage lending in America by major banks due to excitement created in the housing market from builders, buyers, and sellers. In the preceding years before the crisis, the American economy was booming and Americans wanted new houses, so builders built them to comply with the demand and banks granted outrageous mortgage loans to people with no long-term method to pay the loan back.
Everyone got too excited, and thought the “good times” would last forever, but they didn’t. If banks, builders, and homebuyers and sellers had practiced moderation, the crisis could have been avoided or not as intense as it was. In this context, moderation combats excitement and allows for the economy to operate within a normal continuum instead of extremes.
I recommend that business executives read this book to gain necessary insight on the financial conditions that may lead to crises such as the formation of asset price bubbles, the role of monetary policies, and waves of overconfidence in economic growth. They also need to understand the psychology behind financial and economic crises. By knowing what causes economic crises, business can take proactive steps to protect the company, employees, and customer base.
The most important advice is the general belief that we follow at Quinlan, which is to do well by doing good. Most young people are told to measure career success and enjoyment by salary and bonuses, but if they correlate money with success, the idea of doing good gets neglected.
I tell my students that ethical business professionals should always give the loan when it’s deserved, but not give the loan when appropriate financial requirements are not met—even if by not giving the loan, you may not get the bonus. This advice will help students moderate challenges throughout their life and become successful by doing the right thing.