Friday, August 10, 2007

Psychology of subprime mortgages?

There's an intriguing article at The Frontal Cortex describing a study looking at what parts of the brain were involved when people were offered a choice between a small payoff now and a larger payoff later. Basically, the longer payoff activated the reasoning parts of the brain, the immediate payoff activated emotional parts.

He's arguing this may explain some people's willingness to take on subrime mortgages with unrealistically low "teaser" rates, with a higher rate (and much higher payments) after, say, 2 years. After all, you can get a house! A nice house! Move in next week! While the rational part of the brain is saying, "Um, but in 2 years it's going to get expensive..."

And of course, in the middle of a boom market, people convinced themselves that "of course" they could refinance or sell at a profit in 2 years. Except, of course, when you can't.

The article makes sense, though. Hmmm, I could save money and work on losing some weight by fixing a light lunch at home (future payoff); or I could go to the all-you-can-eat pizza bar (immediate payoff). And yes, sometimes irrational decisions get made.

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