Hi Louise! I'd say a perverse incentive is an unintended, second-order effect. For example, the U.S 2008 housing crisis. Lots of wheeling and dealing and fast activity by sellers and buyers where the loan sellers were rewarded by commissions and hence, rewarded by number of sales made--not number of quality or legit sales made. Then, in the higher floors of the building, the home loans were packaged into novelty derivative vehicles which were rapidly turned over for those who purchase those types of investments and then the majority of everyone participating in the housing loan industry not realizing the "home"--traditionally considered a "safer" investment--had ceased to be such an investment due to the activities on the front lines of the housing loan industry. :(
Yes, but I don't want to be too hard on first-time homebuyers. Buying a home is such a novel, massive expensive (typically 30-year loans in the U.S.) and once we sign the line, we cannot easily change course, so I would AGREE to do as much research as possible, and I'd like to tip my hat to our friend Common Sense that says: if everyone is running one way to make money, you probably don't want to also run that way. :)
Hmm. What is a perverse incentive exactly?🤔 How does one recognize a perverse incentive?
Hi Louise! I'd say a perverse incentive is an unintended, second-order effect. For example, the U.S 2008 housing crisis. Lots of wheeling and dealing and fast activity by sellers and buyers where the loan sellers were rewarded by commissions and hence, rewarded by number of sales made--not number of quality or legit sales made. Then, in the higher floors of the building, the home loans were packaged into novelty derivative vehicles which were rapidly turned over for those who purchase those types of investments and then the majority of everyone participating in the housing loan industry not realizing the "home"--traditionally considered a "safer" investment--had ceased to be such an investment due to the activities on the front lines of the housing loan industry. :(
So, know what you’re getting into. Know your field and don’t just do what the rest of the crowd does.
Common sense.
Have we lost that somewhere along the way?
Yes, but I don't want to be too hard on first-time homebuyers. Buying a home is such a novel, massive expensive (typically 30-year loans in the U.S.) and once we sign the line, we cannot easily change course, so I would AGREE to do as much research as possible, and I'd like to tip my hat to our friend Common Sense that says: if everyone is running one way to make money, you probably don't want to also run that way. :)
Wise, that.