Why don't we ever learn?

Superstar economist Robert Shiller (aka Dr. Doom) took a crack at that one during a lengthy interview with Portfolio's Lloyd Grove. The reference centered on Shiller's warnings going back to 2003 that there might be a housing bubble. By 2005, he was raising the possibility of a major housing crisis. Of course, no one listened – even though he’s the same guy who called the dot-com bubble. Guess everyone was too busy buying houses and taking out home equity loans.

L.G.: Why do you think people just have trouble listening to these things?

R.S.: Well, I can talk as a sociologist—which I'm not trained to do—but there's a social construction of reality that happens. This is a basic principle of sociology. We have a "collective consciousness," to quote sociologist Maurice Halbwachs. As far as I know, he coined the term. And the point is, we talk so much. The human species is incessantly talking, and this incessant talk reinforces certain memories and facts. And other facts are not reinforced because no one's talking about them. So they elude our consciousness, and then we can't remember them.

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L.G.: The people who were getting into subprime mortgage-backed securities presumably understood all this. They're very sophisticated people. So what was driving them?

R.S.: Some of them were very sophisticated people [laughs], and there was a failure to communicate and a failure to put all this information together and act on it in a systematic way. There's a famous book written by Irving Janis, who's a psychologist, about 30 years ago, called Groupthink. He's a social psychologist, and he points out how even expert groups can make very colossal errors. He did a number of case studies in the book, and what tends to happen—suppose you imagine yourself and a group of experts who seem to have converged on an enlightened opinion which has arguments to support it, and it has prominent influential people saying that. It can be difficult for someone to stand up in that room and air what seem to be half-baked or half-formed doubts about it. It can be kind of damaging to your reputation. And you imagine that they have a reason to dismiss these doubts. But you don't want to be responsible for bringing it up—especially when they're reaching a decision. Sometimes they're trying to make an important decision. And at that time, you would think that people who have doubts should stand up and thrust them to the fore. But, in fact, they often retreat at that point, because they may just have a sense that they're being annoying, that they will lose status in the group.

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L.G.: And do you think that's the sort of dynamic that might've been operating, not only in quasi-government agencies like Fannie Mae and Freddie Mac, but also in the banks on Wall Street?

R.S.: Yeah, I mean, it became the idea that risk was just not there.