The recent conspicuous examples were currency crises in Asian countries after 1997, but Latin American countries and other countries in the world now and then shared similar experiences. One of the approaches to understand the mechanism of crises is to concentrate on economic fundamentals. According to this approach, the so-called first generation approach, crucial for the crisis is the deterioration of economic fundamentals, such as inflation, government debt, balance of payments deficits, that induces rational economic agents to generate bubbles and their crashes. In this project, we will deviate from the above purely economist approach to an inter-disciplinary approach between economics and psychology. I will try to explore the psychological factors that are involved in our currency crisis experience.
People often make wishful and erroneous expectations.
Economic agents realize, sooner or later, that their expectations were too optimistic or too pessimistic. The so-called contagion of the financial crisis also shows that a crisis in one country would change subjective expectations of speculators on the success probability of a currency attack. Economists describe what would be the consequence of rational players in the market. Psychologists try to describe the characteristics of observed behavior of agents, and claim that the optimizing approach by economists is normative rather than realistic. On the other hand, economists are fearful of beginning voyages without a chart or an anchor.