After the 2007-2008 crisis there appeared to be many discussions on what were the reasons behind the sudden collapse in financial system.In this work Nicholas Barberis discusses some ways of analyzing the crisis with the help of ideas from psychology.He focuses on three aspects of the crisis: estate plunge,high accumulation of subprime-linked securities and the decline the value of risky assets.

The first one is the surge house prices in the years up to 2006.The author questions whether there was a real estate bubble and suggests to study the bubbles and their origin deeper.He also claims that currently there are too many theories behind the formation of bubbles,however,very little are tested and refined.There are many theories which try to explain the reason behind the formation of bubbles.Professor Barberis draws our attention to 5 possible theories behind the formation of bubbles of which he prefers the over-extrapolation theory.Although the author likes the over-extrapolation theory,he argues that this idea itself is not enough to generate a real estate bubble.The reason which lies behind is that houses are bought using outside financing. However,the author still claims that there is a common factor in many previous crisis:a tendency on the part of some market participants to extrapolate past prices increases too far into the future.

Author asked why did the banks accumulate so many subprime-linked holdings which carried some significant risks.And provides 3 popular theories: "bad incentives","bad models","bad luck"."Bad incentives" theory proposed by Acharya (2009) which states that mortgage desks representatives were aware of the risks,however, simply did not care about it because did not have to face the consequences.Behind "Bad model" lies an idea that the same personnel were not aware of the risks because of the faulty reasoning.For example,thanks to over-extrapolation.Finally,"Bad luck".Vassalou thinks that at that time a rational individual would not have assigned a high probability to the poor performance of subprime-linked securities.Thus,this theory states that all collapse happened due to bad luck.However,the author is skeptical about the last theory and also thinks that the other two hypotheses are not satisfactory enough.Therefore,Professor Barberis provides us with an alternative theory of "Cognitive dissonance".It is assumed that traders on the mortgage desks were vaguely aware of serious risks and deluded themselves.

Last but not the least comes the decline in the value of risky assets.The author assumes that the reason for that was purely psychological because the decline was severe despite small delinquencies among subprime loans.There are several explanations.One is rather simple:banks want to compensate for their risky subprime-linked assets,therefore,sell other risky assets.Thus,pushing the prices down even further.The other is the ambiguity aversion idea which states that any person is afraid of ambiguity and hence does not but risky assets. Hence,leading to the same result.Similar to it is the loss aversion theory,where people are afraid to lose money because of their precious losses,therefore making them risk averse. He also states that all of these factors could be changed through belief manipulation.

To sum up,author says that the recent crisis provides us with the challenge to design a financial system that can prevent the crisis to adversely affect the economy.