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Volume 38, Number 3, 2016

Using Neurological Evidence to Differentiate between Informational and Social Herding among Strategic Mortgage Defaulters

Michael J. Seiler
The College of William & Mary

Eric Walden
Texas Tech University


Great debate is being waged between whether strategic mortgage defaulters follow a herd for social reasons or mimic others' behavior for informational gain purposes. Using functional Magnetic Resonance Imaging (fMRI), the latest neurological technology allowing for observation of brain activity during strategic mortgage default decision-making, we find that when defaulters learn of peer default behavior, they acknowledge the social component of the decision, but feel freer to make their own decisions. Alternatively, when observing the behavior of a maven (real estate expert), borrowers still consider the social aspect of the decision (although to a lesser extent), but ultimately follow the maven who presumably possesses a greater information set. Alarmingly, borrowers only significantly follow the herd when mavens advocate strategic default, not when they recommend against it.

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