From wheel of fortune to wheel of misfortune: Financial crises, cycles, and consumer predation

• DOI: http://doi.org/10.1111/joca.12326
• Author: François‐Éric Racicot,Nicolas Huck,David W. Shanafelt,Olivier Mesly
• Published date: 01 December 2020
• Date: 01 December 2020

ARTICLE

From wheel of fortune to wheel of misfortune:

Financial crises, cycles, and consumer

predation

Olivier Mesly

1

| David W. Shanafelt

2

| Nicolas Huck

1

|

François-Éric Racicot

3

1

ICN Business School - CEREFIGE -

University of Lorraine, Nancy, France

2

Université de Lorraine, Université de

Strasbourg, AgroParisTech, Centre

National de la Recherche Scientifique

(CNRS), Institut National de Recherche

pour l'Agriculture, l'Alimentation et

l'Environnement (INRAE), Bureau

d'Économie Théorique et Appliquée

(BETA), Nancy, France

3

Telfer School of Management and an

Affiliate Research Fellow at IPAG

Business School, University of Ottawa,

Paris, France

Correspondence

David W. Shanafelt, Université de

Lorraine, Université de Strasbourg,

AgroParisTech, Centre National de la

Recherche Scientifique (CNRS), Institut

National de Recherche pour l'Agriculture,

l'Alimentation et l'Environnement

(INRAE), Bureau d'Économie Théorique

et Appliquée (BETA), Nancy, France.

Email: david.shanafelt@inrae.fr

Abstract

Predator–prey dynamics are widely used in ecology but

seldom utilized in economics and marketing, despite

their ability to express financial market agents' behav-

iors when considered in combination with economic

cycles and financial crises. This multidisciplinary arti-

cle presents a stylized framework of a market cycle that

combines the notions of supply and demand and

predator–prey interactions between buyers and sellers

of housing mortgages. We illustrate our framework

using data from the Global Financial Crisis and a

Lotka-Volterra predator–prey model. We find that with

our framework we can capture the dynamics of the mar-

ket, particularly the peak and decline in the number of

sellers and sold subprime mortgages. Our framework

sheds a new light on consumer behaviors, pinpointing

how they can put themselves into vulnerable prey posi-

tions. This article is one of the first of its kind to propose

market phases and predator–prey dynamics nested in

economic cycles and consumer buying trends.

KEYWORDS

consumer abuse, financial crisis, predator-prey behavior,

regulations, toxic products

Received: 3 February 2020 Revised: 5 June 2020 Accepted: 11 June 2020

DOI: 10.1111/joca.12326

© 2020 American Council on Consumer Interests

J Consum Aff. 2020;54:1195–1212. wileyonlinelibrary.com/journal/joca 1195

1|INTRODUCTION

Financial markets have always contained idiosyncrasies (Brunnermeier and Sannikov, 2014), in

which winners are few and losers are numerous (Kindleberger, 1996; Sorescu et al., 2018). Mar-

kets worldwide are poisoned by dysfunctionality (Aguilera and Vadera, 2008), with yet

unexplored forms of social psychopathy (Boddy, 2015) and moral hazard, defined as, “the fail-

ure of either to behave diligently or in good faith at any point in the exchange”(Ericson and

Doyle, 2003, 11).

The 2007–2009 Global Financial Crisis (GFC) is no exception. It arose due to several factors

involving human decisions by both consumers and lenders (Glaeser et al., 2008), hidden

maneuvering and “unruly deregulation”(Krugman, 2009) such as the Glass-Stegall Act revision

in the 1990s, which encouraged banks to seek unqualified clients (White, 2009).

i

Many experts blame quicksand-like regulations and excessively easy credit access (West and

Prendergast, 2009; Fostel and Geanakoplos, 2012). Heavily misleading advertising and promo-

tions were also factors that contributed to the mayhem (Calomiris and Wallison, 2008;

Ben-David, 2011). Indeed, much of the unexplained volatility of the housing market can be

explained by analyzing the interplay between astute, calculating financiers (predators) and

naïve and overconfident buyers (prey) (Cochrane, 2005), which caused the extraordinary rise

and equally spectacular collapse of housing prices. Many buyers dreamt of living exuberantly

and thus exposed themselves to more risk than they should have (Shiller, 2005). Often buyers of

subprime mortgages had little or no financial literacy (Dinwoodie, 2010), belonged to low

income brackets (Roy and Kemme, 2012; Shiller, 2012), and suffered from cognitive and/or psy-

chological weaknesses, making them more receptive to misleading advertising (Yoon

et al., 2005; Danis and Pennington-Cross, 2008; Wang, 2009). As argued by some authors, the

Federal Trade Commission failed to inform borrowers/consumers of the danger of subprime or

predatory mortgages (Bone, 2008).

ii

The International Monetary Fund describes the rising home prices as a phenomenon that

concealed the lax lending standards set by the U.S. government (IMF, 2009, Chap. 2). Origi-

nally, these standards were supposed to serve as barriers of entry into the market. However,

they acted as an invitation for lenders to deceive and commit fraud and created a pool of over-

stretched borrowers/consumers lured into the housing market by the temporary ease of financ-

ing or refinancing. Once these so-called sweetheart deals (including teaser rates) came due for

renewal, consumers were faced with higher interest rates and monthly mortgage and credit

card payments (Akerlof and Shiller, 2009; Ben-David, 2011). Then, as house prices plateaued or

declined, those borrowers/consumers were doomed, facing delinquency or foreclosures. They

no longer contemplated a wheel of fortune but rather a wheel of misfortune.

Our primary research question asks whether the incorporation of predator–prey dynamics

into the depiction of the market can better explain the cyclical patterns of financial crises and,

in particular, the GFC. To answer this question, we present a framework of a market cycle,

incorporating predator–prey dynamics from ecology and notions of supply and demand. We dis-

cuss socio-psychological concepts inherent in consumer behavior that go beyond traditional

assumptions, such as rationality in economics, and the roles of human behavior in the GFC

financial market. The present article focuses on exceptional markets, specifically ones in which

high levels of volatility and market frictions are nourished by toxicity in the form of predatory

behavior between market agents. Indeed, it is a story of dysfunctional agents in dysfunctional

markets.

1196 MESLY ET AL.