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Finance and the Good Society by Robert J. Shiller

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Chapter 23

Debt and Leverage

The impulses described in the preceding two chapters can interact to create a dangerous situation regarding debt and leverage. The impulse toward risk taking can cause people to disregard danger signals and run with crowds and bet on bubbles, taking on too much debt to do so. The impulse toward conventionality and familiarity can mean that they take no steps to protect themselves from the risks they assume. When the calamity comes, they are in serious trouble. It is no surprise that people have done such things repeatedly throughout history, given the primacy of these basic impulses.

When one has borrowed a considerable sum, using conventional debt, any slight decline in one’s economic fortunes can lead to disaster, ...

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