When there was a rapid increase in valuation of housing, lenders and buyers strongly believed that prices would keep going up. The subsequent drop in housing values left both banks and borrowers with huge losses. This incident is a result of:
A)representativeness heuristic.
B)anchoring bias.
C)availability bias.
D)fundamental attribution error.
E)over-confidence bias.

Question

Quizplus · Accepted Answer

The overconfidence bias relates to our tendency to be over-confident about estimates or forecasts. This bias is particularly strong when you are asked moderate to extremely difficult questions rather than easy ones. In this case, lenders and buyers were overly confident that prices of housing would keep going up and the subsequent drop in the values left both banks and borrowers with huge losses.

When There Was a Rapid Increase in Valuation of Housing