From 2006, house prices raised very fast. This could be caused by the irrational thinking in investors.

There are many theories associated to that symptom. The theories may be divided into two categories: investor beliefs and investor preferences. n the preferences side, investor may choose their portfolio based on their e!periences or may be stimulated by lottery"like product. n the belief side, there are three main hypothesis. First is when investors may be vary greatly on their thinking about the value of asset future value. Then in the short"sale constrain circumstance, the value of asset is determined by the optimist one. The second is about e!trapolate the past carelessly leads to overvaluation assets. The final one is overconfidence about the forecast ability of investors, therefore they tend to stick to the belief that the price will rise. From those above theories, according to the author " #icholas $arberis, one may be represented the whole real estate crisis in 200% is over e!trapolate the past based on representativeness heuristics. The problem occurs when the risk rises too high and the value is far over the real value of asset. &t the same time, this behavior lead to the systematically error in the financial system when underestimate the risk of sub"prime lending. #ot only the home buyers wrongly estimated the rise in price, but also the related financial systems were at the same problem. There was over supply of credit to sub"prime home buyer mainly and sub"prime linked securities in general. n the rating agency side, they were too enthusiasm in rating those risky asset as safety. There were three reasons that trigger this happened. First is bad intention in making money with out care about the risk and the failure that the bank or organi'ation may suffer. The second reason is wrongly reasoning in the banking employees. The third is the thinking that there was small probability in risky. (n the author view, the first two were more applicable to this situation. )owever, that twos does not make us understand the behavior clearly. That is people are always want to highly regards in their doing. *o for the e!planation, that could be done by the physiological thought: they change their belief about risky to compensate to their wrongly desire or cognitive dissonance. The fall of value of many risky asset can be triggered by psychological amplification. +hen the risk are too high because of overevaluation, the price fall down a little. $ut what can be e!plained for falling price too deep, That are two symptoms: ambiguity aversion and loss aversion. +hen they thought that they could not predict the future correctly, or uncertain about the future, they will be lead to ambiguity aversion, that is decline the holding of risky asset. That caused the price felt. (n addition, the loss aversion, which affect people more than gain at the same amount, arose the thinking of losing money, so they tend to react e!aggerate by selling their asset.