Panic Is Perfectly Rational

Walking away from your hopelessly underwater mortgage: everyone's doing it! But a new study says that these "strategic" defaults ("strategic"= commonsensical) are driven by anger and fear, not rational calculation. Well. There are plenty of reasons to be angry.

The WSJ reports on the study's findings—that while the rich and savvy tend to strategically default for savvy reasons, the put-upon poors are more likely to do so "because they are anxious about their financial situation; others are furious that banks or the government won't help ease their load while other people are getting assistance. Hopelessness is a factor for others."

I guess so! If you are a poor person with a subprime mortgage on a house that has plunged in value since you bought it, hopelessness, anxiousness, and fury all seem like reasonable reactions. And that's not the only thing. Why did more Americans move last year than the year before? It was "almost entirely the result of people moving within their home counties, as they lost their homes to foreclosure."

Basically, if you bought a home in the last five years, and you're not rich, it seems like a perfect time to be angry, scared, and/ or hopeless. At least you don't have to feel like you're irrational, too.

UPDATE: Brent White, the man who did the actual study referred to in the story, sends us this note:

Mr. Hamilton,

You have misread my article - or perhaps you are relying upon the WSJ story. First, I agree in my article that panic can be rational. Second, I make no distinction between the poor and the rich. My article is quite sympathetic to people who default and I wrote it, in part, in hopes of helping other understand their plight. You can download the actual article on SSRN here.

[Pic: cogdogblog]