My review of A Crisis of Beliefs, by Nicola Gennaioli and Andrei Shleifer.
GS directly attack the hypothesis of “rational expectations,” which has dominated the economics profession for forty years. The rational-expectations doctrine holds that when economic actors make decisions that require forecasts, they make optimal use of the available information. They are not guilty of predictable irrationality.
. . .Think of a forecast as employing two types of information about a variable being forecast. One is a “base rate,” which is a very generic property of the variable. The other is “recent information” about that variable or about factors that could affect that variable. Recency-biased forecasting over-weights the recent information and under-weights the base rate.
The recency bias would predict more bankruptcies in places with constrained supply. Those places will tend to have more volatile housing prices, and indeed the prices spiked much higher (proportionately) in what Krugman calls the “zoned zone” than in what he calls Flatland. If people have recency bias, then they would tend to over-leverage themselves wherever prices had recently spiked.
Is that what happened?