The Icelandic Crash: A Behavioral Finance Perspective

The Icelandic Crash of 2008 was one of the most dramatic and well-documented financial crises in history. In a matter of months, the country's three largest banks collapsed, the stock market lost 90% of its value, and the government was forced to seek a bailout from the International Monetary Fund.

The Icelandic Crash has been the subject of much study and analysis, but most of this work has focused on the macroeconomic factors that led to the crisis. In this book, I take a different approach, examining the crisis from a behavioral finance perspective.

Behavioral finance is a field of study that seeks to understand how psychological factors influence financial decision-making. By applying the principles of behavioral finance to the Icelandic Crash, I am able to provide a new and unique perspective on the events that led to the crisis.

The Icelandic Crash with the View of Behavioral Finance

by Margaret Fuller

4.6 out of 5

Language	:	English
File size	:	134 KB
Text-to-Speech	:	Enabled
Screen Reader	:	Supported
Enhanced typesetting	:	Enabled
Word Wise	:	Enabled
Print length	:	51 pages
Lending	:	Enabled
Paperback	:	242 pages
Item Weight	:	15 ounces
Dimensions	:	6 x 0.55 x 9 inches

FREE

The Icelandic Crash was caused by a number of factors, including:

• Lax lending standards: Icelandic banks lent out large sums of money to risky borrowers, often without requiring collateral.
• Asset price bubble: The value of Icelandic assets, such as real estate and stocks, rose rapidly in the years leading up to the crisis. This created a false sense of wealth and encouraged people to take on more debt.
• Lack of regulation: The Icelandic government failed to adequately regulate the banking sector, allowing banks to take on excessive risks.
• Global financial crisis: The Icelandic Crash was part of a larger global financial crisis that began in the United States in 2007. This crisis led to a sharp decline in the demand for Icelandic exports and a loss of confidence in Icelandic banks.

The principles of behavioral finance can help us to understand how these factors contributed to the Icelandic Crash. For example, the theory of overconfidence suggests that people tend to overestimate their own abilities and knowledge, which can lead them to take on more risk than they should. This theory can help to explain why Icelandic banks were willing to lend out large sums of money to risky borrowers.

The theory of herding suggests that people tend to follow the crowd, even when it is clear that the crowd is wrong. This theory can help to explain why Icelandic investors continued to buy stocks and real estate even as the asset price bubble was growing.

The theory of anchoring suggests that people tend to rely too heavily on the first piece of information they receive, even when it is later shown to be inaccurate. This theory can help to explain why Icelandic policymakers were slow to react to the crisis, even as it became clear that the banking sector was in trouble.

The Icelandic Crash is a cautionary tale about the dangers of excessive risk-taking and the importance of financial regulation. The lessons of the crisis can help us to prevent similar crises from happening in the future.

Here are some of the lessons that we can learn from the Icelandic Crash:

• Lending standards should be tightened: Banks should be required to lend money only to borrowers who are likely to be able to repay their debts.
• Asset price bubbles should be monitored: Governments and regulators should monitor asset prices for signs of a bubble and take steps to prevent bubbles from forming.
• The financial sector should be regulated: Governments should regulate the financial sector to prevent banks from taking on excessive risks.
• People should be aware of the risks of investing: Investors should be aware of the risks involved in investing and should not invest more money than they can afford to lose.

The Icelandic Crash was a complex event that was caused by a number of factors. However, the principles of behavioral finance can help us to understand how these factors contributed to the crisis and to learn from the mistakes that were made.

By applying the principles of behavioral finance to the Icelandic Crash, we can help to prevent similar crises from happening in the future.

The Icelandic Crash with the View of Behavioral Finance

by Margaret Fuller

4.6 out of 5

Language	:	English
File size	:	134 KB
Text-to-Speech	:	Enabled
Screen Reader	:	Supported
Enhanced typesetting	:	Enabled
Word Wise	:	Enabled
Print length	:	51 pages
Lending	:	Enabled
Paperback	:	242 pages
Item Weight	:	15 ounces
Dimensions	:	6 x 0.55 x 9 inches

FREE