The Giant Pool of Money

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To overcome social proof bias, it is important to analyze the situation thoroughly before believing what is perceived by others as correct. The brokers, investors, and individuals were all influenced by the social proof bias. The subprime mortgage crisis developed because lending policies were becoming less strict. Rapid growth in mortgage-backed securities enabled brokers like Mike Garner to sell mortgages without any verification. Even though Mike’s boss made efforts to reason the ethics of guidelines, the owners always answered, “Other people are offering it. We’re going to offer it too” (Thisamericanlife.org, 2008). The lending policies for NINA loans should have been re-evaluated and reformed. Mike did not follow a process to record the borrower’s information and how these loans were pooled together. Mike’s decision to sell NINA loans, was based on short-term gains and ignored future consequences. Mike could have devised an alternative sales strategy rather than resorting to lower lending standards. Mike should have examined the risks of selling loans to individuals who had no income source or did not have the capability to pay off their loan. Because Mike was inexperienced about mortgage business, his only recourse was to follow other broker firms and ignore what he thinks is ethically right or wrong.

Large firms like Goldman Sachs and Merrill Lynch started buying NINA loan mortgages based on the fact that smaller firms were buying. These firms should have researched before following suit. The large firms should have invested in research and held on to its decision of not buying NINA loan mortgages. Their decision to invest in such mortgages increased the credibility of those loans. The large firms added to the confidence of small firms to invest in NINA loan mortgages. The large firms should have focused on long-term gains rather than short-term rewards to avoid Social Proof Bias. Any decision should be data or research driven and not based on the fact that if others are doing it, it is the correct thing to do.

Conclusion

Consequently, was apparent that the lack of sound decision making was what drove home buyers and investors to such extremes. Social proof and the confirmation trap proved to be too ensnaring for many. Risky loan deals appeared to work for all parties, investors turned exceedingly large profits while individuals who sought to buy homes were able to do so. It was this reasoning that skewed each party’s decision making. In order to avoid such disastrous results, both investors and loan seekers should have investigated and analyzed the market for warning signs. Investors, like Mike Garner, would have greatly benefitted from taking a broader view on the impacts of NINA loans. For example, rather than fully believe in appealing data projections, they should have thoroughly examined current data for any possibilities of failure. Similarly, the home buyers should have recognized the bare minimum loan requirements and the amount they were lent seemed suspicious. If each of these groups were prepared for their dealings, the trap of heuristics could have been avoided in favor of much more sound decision making.

References

Bazerman, M. H., & Moore, D. A. (2015). Judgment in managerial decision making. Hoboken, NJ: Wiley. Retrieved September 30, 2017, from https://cb.hbsp.harvard.edu/cbmp/content/70003740

Cialdini, R.C. (2006). Influence: The Psychology of Persuasion (Revised Edition). Arizona,

United States: Harper Business

Thisamericanlife.org. (2017). This American Life. Retrieved 30 September, 2017, from

https://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money