Question

Explain how Greenspan was guilty of the law of small numbers.

Answer 1

Because when Greenspan decided to decrease funds rate to 1 %, hoping to spur the economy & increase spending. Which actually did. Greenspan is responsible for 2007-08 crisis as Fed ‘caused it by deviating from historical precedents and principles for setting interest rates which had worked well for 20 years’. Law of small numbers say that people predict short-term trends in market & believe it will continue. Similarly, Greenspan believed that methods used 20 years ago will work in whole new era.