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Wed October 26, 2011
Dr. Michael Seiler, Old Dominion University - Strategic Default and Mimetic Herding
Albany, NY – In today's Academic Minute, Dr. Michael Seiler of Old Dominion University explains how the human tendency to copy the behavior of those around us contributed to the ongoing mortgage crisis.
Michael Seiler is the founding Director of the Institute for Behavioral and Experimental Real Estate (IBERE) and Professor and Robert M. Stanton Endowed Chair of Real Estate and Economic Development at Old Dominion University. Dr. Seiler has published 90+ research studies, several books, and serves as co-editor for the Journal of Real Estate Literature.
Dr. Michael Seiler - Strategic Default and Mimetic Herding
The theory of Mimetics can be described as a biological predisposition to learn through the emulation of observed behavior. Babies mimic the facial expressions of adults long before they understand the intricacies of the emotions those facial expressions convey. This type of social learning through imitation is one of the earliest forms of learning and never leaves us, even as adults. Since mimetic behavior is conducted on a sub-conscious level, people are unaware, and often do not believe, they can be readily influenced by simply observing the behavior of others.
In the mortgage markets, an economic default describes a situation when a homeowner defaults on his mortgage due to an inability to make monthly payments, whereas a strategic default is said to occur when a homeowner makes the conscious choice to default on his mortgage when he is fully capable of making his monthly payments. The recently observed increase in strategic defaults is a major contributor to the foreclosure epidemic and resulting stalled economy. We liken the increased willingness to strategically default to a disease that can spread throughout the market potentially causing irrevocable damage to the economy. Accordingly, we investigate how individuals mimetically herd following the observed behavior of their peers as it relates to the decision to strategically default on one's mortgage. This is an important first step in the investigation of the spread of a contagion over a social network and how it might be stopped.
We find that homeowners are easily persuaded to follow the herd and adopt a strategic default proclivity consistent with that of their peers. Herding behavior is stronger when a maven, or thought leader, is involved and weaker when the person finds strategic default to be morally objectionable. Homeowners appear to herd more for informational gains rather than for social reasons. In a robustness check using a sample of real estate professionals, the strong mimetic herding result continues to hold.