Confidence, Conflict, and Contagion: Behavioral and Structural Drivers of Inflated Credit Ratings During the Global Financial Crisis

Abhiram Sai Kondubhatla

doi:10.36948/ijfmr.2025.v07i06.60523

Confidence, Conflict, and Contagion: Behavioral and Structural Drivers of Inflated Credit Ratings During the Global Financial Crisis

Author(s)	Abhiram Sai Kondubhatla
Country	India
Abstract	“How were the rating agencies able to give out top ratings to the MBS/CDO/CBOs which amplified the GFC and the magnitude of the housing bubble especially from the behavioral aspect, such as overconfidence or confirmation bias?” This paper explains how Credit Rating Agencies (CRAs) assigned inflated ratings to these instruments, thereby amplifying the Global Financial Crisis (GFC) and the housing bubble. Focusing on behavioral dimensions of decision-making within rating agencies, the paper shows how overconfidence, confirmation bias, and herd mentality interacted with structural incentives in the issuer-pays model. Overconfidence in quantitative risk models such as the Gaussian Copula created an illusion of precision, while confirmation bias led analysts to dismiss early signs of rising default risk. Groupthink and competition for market share reinforced these errors, leading to systematic inflation of AAA ratings. A formal framework models rating agency behavior as the maximization of profits under the competing pressure of revenue reputation and distortion as well. This paper further analyzes how the behavioral failures have transmitted through the financial system which has amplified both the US housing bubble and global contagion. The findings highlight that a full understanding of the crisis requires accounting for both economic incentives and the psychological distortions that shaped risk perception and decision-making within CRAs.
Field	Sociology > Banking / Finance
Published In	Volume 7, Issue 6, November-December 2025
Published On	2025-11-13
DOI	https://doi.org/10.36948/ijfmr.2025.v07i06.60523

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Confidence, Conflict, and Contagion: Behavioral and Structural Drivers of Inflated Credit Ratings During the Global Financial Crisis

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