A stylized model of home buyers’ and bankers’ behaviors during the 2007-2009 US subprime mortgage crisis: A predatory perspective

We examine the behavior of market agents during the years leading to the 2008 US subprime mortgage crisis using a stylized Capital Asset Pricing Model (CAPM) model. In our study, an average investor eager to make money by flipping houses meets a banker who offers him subprime mortgage deals. We refer to recent research that shows the mechanics of the psychological and behavioral components of these two market agents. In particular, much in line with the famous Stanford experiment, it is assumed that investors adopt a predator or a prey position. Our analysis shows that, given a historical tendency towards financial predatory acts on the part of market agents (including buyers), government regulations should be adapted and strengthened to face this dooming reality.