An interesting new working paper by Peter Lunn in the ESRI looks at decision-making biases and the Irish banking crisis. The article outlines extrapolation biases, confirmation bias, overconfidence, ambiguity aversion, behavioural convergence, time inconsistency and loss aversion as potential contributors to the banking crisis. There is a lot of interesting material in the article. One issue I have is that many of the biases outlined are general mechanisms and so don’t give a theory as to why Ireland, in particular, had such a dramatic crisis that was so systemic. I think ultimately a behavioural theory of the Irish banking crisis should have some interaction mechanism perhaps with country size or network density. Another area that I think should be developed is the extent and determinants of underdiversification in Irish household wealth portfolios both in terms of country concentration and asset class concentration. I am writing a lengthier comment on this and will link from this post, but put the paper up for now for info.