Hersh Shefrin : From Bad to Disaster : Forbes
Hersh Shefrin, Mario L. Belotti Professor of Finance, published an article discussing the genesis of the financial crisis in Forbes. He highlights the different psychological elements that pushed the crisis from bad to disaster, including the decision to let Lehman Brothers fail.
An excerpt from the article:
Lehman Brothers did not have to fail, and the decision to allow it to fail was psychologically driven.
The official explanation is that because the value of Lehman’s collateral and net worth was so low, the U.S. government lacked the legal authority to save the firm. This view has been strenuously argued by the principal decision makers who chose not to rescue the firm, former Treasury secretary Hank Paulson, former Fed chair Ben Bernanke, and former head of the Federal Reserve Bank of New York Timothy Geithner. My view is that individual psychological issues impacting Paulson, and group psychology issues impacting the dynamics that characterized the communication among the three principals, were the true drivers of the decision.
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