In this story borrowers failed to recognize the regression to the mean bias which states that over time things will average out. This meant that home prices cannot simply continue to rise but that they will eventually settle back to a normal level. Borrowers believed that home prices would continue to rise and that they were making safe investments. There was little fear of adjustable rate mortgages because borrowers thought that they could always sell their home for more than they paid and walk away with a nice return. Clarence Nathan is an example of this, he viewed a $540,000 NINA loan as a quick solution to his financial problems. He thought that he would be out of his situation within a year and could move forward with his life. This particular loan has now put …show more content…
It is easy to look back and say what were these people thinking but when you take a closer look at some of the biases involved involved the borrowers, the lenders and the investors are to blame. The system just seemed to lack the necessary checks and balances and finally spun out of control. In the end the borrowers, the highly leveraged banks and the investors (Giant Pool of Money) all lost. By failing to recognize and adjust for these biases people continued down a very slippery slope. This story serves as a great example of how biases can have major large scale negative impacts in our