Why Men, and Not Swans, Ignite Financial Crises

"Have you ever wondered what leads to a financial crisis? While much has to do with absence of regulation or unanticipated events, there might be another important, often overlooked factor: human beings," says host David Wayne Callahan introducing the first episode of Clarity in a Messy World, the Bocconi podcast that looks at the causes behind the most confounding issues of our time.

Since the traditional economic paradigm of a perfectly rational person has shown its weaknesses, a growing number of scholars are resorting to behavioral economics and behavioral finance to explain not only crises, but the way humans make decisions and apparently bizarre choices. Nicola Gennaioli, Professor of Finance at Bocconi, in helping us understand our biases and stereotypes, starts from the reason why most of us, when asked to think of a Irishman, think of a red-haired man even if only one Irishman in ten has red hair, and ends up critiquing the traditional explanations of financial crises.

"One of the rational explanations of financial crises is that they're like black swans or perfect storms - they're unpredictable events that occur because of the rare combination of many unlikely events," he says in the podcast. "I think that this approach has three problems: the first one is that financial instability occurs way too often - not always of the devastating kind of 2008, but way too often. The second reason is that there is predictability in financial crises, which is inconsistent with the idea that crises are just black swans. The third reason is that peoples' beliefs, namely over-optimism, actually connect to the predictability. This is a very different world from one in which rational investors get unlucky."

Clarity in a Messy World is available on Apple Podcasts, Google Podcasts, Spotify, Spreaker, and YouTube.