Behavioral Explanation to Financial Crisis of 2008

Financial meltdowns are cyclical occurrences appearing time and again in all market economy. Though each case of melt down appears to be unique, researchers could find resemblance of crises with each other. Again, analyses found that 2008 crisis, dot com bubbles&other financial meltdowns have the presence of various anomalies in the financial markets. The epicenter of subprime crisis of 2008 was USA while the contagious effects spread fast to all financial markets around the globe and the world has not yet recovered fully from this crisis. Attempts are made to explain the severity of subprime crisis through psychological biases of all players of the financial markets. Psychology comprising of desires, perceptions, emotions, and values, are at the center of behavioral finance. The paper have attempted to explore the behavioral traits influencing financial decision and its reflection among investors, financial institutions, companies and even the government. The paper first focuses on genesis of subprime crisis of 2008 stepwise and then analyses the effect of behavioural biases to explain the intensity of the crisis. Various behavioural biases like herding, over confidence, confirmation bias and greed found to be responsible for causing great financial crisis of 2008.