Interesting piece from Wharton on the psychology behind the financial crisis. It makes the point that the crisis was underpinned by a mix of optimism and delusion, which created the bubble in the first place.

And it makes the point that people are now so traumatized that they have become risk averse and that they are likely to stay in that place for many years.

For them to be brought around, the perpetrators of the disaster need to be brought to account and the public needs to see that governments and business leaders need to behave responsibly from now on.

But what's really needed however are policies to ensure bubbles are contained before they get out of control. A responsible government would bring in systems that anticipate our thinking and inhibit bubbles. But instead of winding back market activity, we need initiatives like continuous workout mortgages that automatically adjust the terms of the loan to the borrower's ability to pay, housing futures markets, comprehensive financial advice for the poor and a massive education campaign focusing on financial literacy for the masses.

Instead, the US Government seems to focusing on the psychology of the market by talking it up and expressing optimism. A more strategic approach to keep a lid on future bubble would be more effective in the long run and sound public policy.