Working Paper BETA #2020-35

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

Author(s) : Olivier Mesly, David W. Shanafelt, Nicolas Huck

Abstract : Predator-prey dynamics are widely used in ecology but seldom utilized in economics and marketing, despite their ability to express financial market agents’ behaviors when considered in combination with economic cycles and financial crises. This multidisciplinary paper 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 are able to capture the dynamics of the market, 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 positions. This paper is one of the first of its kind to propose market phases and predator-prey dynamics nested in economic cycles and consumer buying trends.

Key-words : Toxic products; predator-prey behavior; financial crisis; regulations; consumer abuse

JEL Classification : M31, N22, N42, O16, P46, R31