Disaster myopia

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The concept of Disaster myopia, applied mostly in financial economics, connotes the differences between objective and subjective probabilities of unwanted events, particularly when cyclical recurrence would suggest such unwanted events may be approaching.

[edit] Overview

Jack Guttentag and Richard Herring in their 1984 article “Credit Rationing and Financial Disorder” (The Journal of Finance, volume 39, number 5, pp. 1359-82) first applied this concept to international lending by commercial banks. They suggested that, when decisionmakers are uncertain if an unwanted event may occur, they tend to lower the expectation that the event will in fact occur to them, as the time since the previous such event had happened increases.

Subjective probabilities for such events, for example defaults, are lowered below what would be justified by objective probabilities based upon past occurrences of such events.

[edit] Analogy

An analogy by Arvind K. Jain in "Investor Behavior and Global Financial Crises", 2004 exemplifies the concept: "Drivers are likely to drive cautiously soon after they have witnessed an accident. But as the memory of the accident recedes, they may go back to their old driving habits. The objective probability of the accident does not change as the time since the observation of the accident increases, only the subjective probability of an accident becomes lower in the mind of a driver as the time since the last reminder of an accident increases."