Richard Thaler on the financial crisis

A video from the Newshour with Jim Lehrer.

Q: But what about the mentality of the investors, the markets that need to gain confidence? What do we know about what drives that on a given day or what it takes to turn it around?

Thaler: Well, I think we don’t know much. I think one thing that should be stressed is that we don’t really know whether there is a panic here. We have lots of uncertainty. And when there’s lots of uncertainty, we expect volatility. People can’t really make sense of this.

The other thing I would say is that whatever is going on is primarily being driven by professionals. This is not a retail panic. And I’m not sure that there is a panic.

People are reacting to very real things. The credit crunch is quite real. And people in the money management side are worried about people withdrawing their money. They’re having trouble borrowing. And so they have to reduce leverage, and all of that drives prices of risky assets down.

A radio interview on The World. “There’s a tendency to talk about this as a panic, and maybe there’s a panic, but frankly there’s an even scarier interpretation of what’s going on, which is this isn’t a panic, it’s actually quite real. Things are as bad as we’re fearing, and that we’re just going to have to suck it up and live a bit more frugally.”

And a CNN clip on Nudge. The reporter is tempted by french fries.

Tags: ,