Credit Crisis - Basic concepts & global influence (sec.)

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Module 3: Concept Map

af brittany.hess@ttu.edu brittany.hess@ttu.edu

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Credit Crisis - Basic concepts & global influence

psychology of risk

findings

general: people react to incentives

people in general are risk-averse

favor lower secure win over higher but less possible win

avoid risks if possible

people assess risk lower if

has no connection to them

it is (hghly) abstract

people assess risk higher if

or if it evokes strong emotions

or if there's a good background story to it

or have a personal link to the risk

they have a vivid impressions of the risk

top expert: Kahneman

Nobel prize in 2002

behavioral psychologist

nice overview

Crisis of the US housing market

CDO is sliced up in good, okay and risky mortages which are seperatly sold to investers, other bankers and "risky bankers"

Untertopic

the investment banker puts them in one box called CDO

risky sub-prime mortgages are bought in high quantatiy by investment bankers

("high risk" and "low risk" mortgages are sold as one big mortgages)

Give loans without checking peoples financial situation

risk

trusting eachother AND passing risk along

--> exp: mortages = bombs Passing "bombs" to the next --> not caring about the consequences

Nothing would happen, because it didnt happen before

exp: no vivid memories (Kahneman)

bad risk management

Haupt-Topic

Leverage

functionality

profit

pay money + interest back

sell pruduct w/ higher price

buy product

borrow money

widely used

low credit on loans

high profit deal

Germany

single market recession

less money to buy products

econemy relies on exports

no one to import pruducts

exporting less

could suffer worst recession since WWII